Margin lending for ETFs?

[Kitties are the best]

Hi Aussie friends
Wondering about margin lending for ETFs... I [F40, a long way from retirement] have recently secured a new job which firmly puts me into the top tax bracket.

Right now my investment strategy is fairly basic... once bills are paid, I split my income between:
- maxing concessional super
- buying ETFs
- putting the remainder into my offset account (owner occupied).

I have c100K in ETFs and c$200K in my offset.

I'm thinking it might be appropriate to apply for say, a 50K margin loan and buy more ETFs? The interest on the loan would be tax deductable (I have very little to claim currently, so this is somewhat appealing). If the market drops and I get a margin call - I have the cash on hand in my offset to pay out the loan.

Am I missing anything? I am keen to invest a little more aggressively than I've done so far. However, I am not keen on buying an investment property as the market seems bananas to me and I'm not convinced I'd be able to pick a property with genuine capital growth.

Would love people's thoughts & advice!

[deborah]

Some years ago, a mustachian put a link to an asx research paper about borrowing to purchase shares vs not borrowing. While there was a small advantage in borrowing, the outcomes over 10 years were very similar, despite the tax advantages. I was somewhat surprised about this.

[Murdoch]

Hi,

I suggest avoiding the margin loan.
You have solid disposable income. Put this to ETF each pay. It will quickly mount up and start working for you.
Offset funds could also be put to earlier purchase of ETF portfolio, but you are obviously holding this for other reasons otherwise you would have done so already.

I don't think chasing tax deductions for the purpose of having tax deductions is worth it.
Unless the investment is so likely to succeed you deem that risk to be worth it, which is personal.
The share market may rise substantially making margin loan worth it, or it may not.

Not a straight answer sorry, but I personally would not do this in your circumstance.
By the time you hit 50 you could be in a position to retire without the risk of margin loan chasing what would be arguably small wins if only $50k being considered.

Cheers
Murdoch

[Kitties are the best]

Thank you Debbie and Murdoch. Two thoughtful answers towards 'no'.

Murdoch - the $200K in my offset isn't earmarked for anything in particular. It's offsetting the variable portion of my home loan, so saving a bit of interest but that is it.

It was going to be a deposit on an IP but having looked at the market, I don't feel comfortable buying  right now.

I've been pretty risk adverse with my finances generally so wondered if leveraging an investment loan would potentially bring greater returns. 

I could definitely put 50K of my own money into EFTs... and invest the salary increase I'm receiving too. You're probably right about not chasing tax returns... my return is always minimal... like a grand or so...

[alsoknownasDean]

Couldn't you just use $50K of the offset? I'm sure that even taking into account tax deductions on a margin loan using the offset would be cheaper.

Also, no margin calls if LVR thresholds are breached.

[Murdoch]

Hi,

You're young and have a good salary.
Coupled with consistent dollar cost averaging, and taking advantage of superannuation, you'll be on a path to FI in no time.

Other paths may get there faster, and there is probably a maths answer to your question with degrees of probability of success.
I'm just not sure you need to reach to succeed financially.

If you've got that offset ready it could be considered powder for when some opportunity arises in coming years.
Maybe the perfect IP, or a massive tank in the market etc...
You could capitalise on either of these inevitable events.
And it's not just sitting there contributing nothing. That $200k is currently earning you $6k per annum on a 3% mortgage rate:)

Cheers
Murdoch

[MrThatsDifferent]

Hi,

You're young and have a good salary.
Coupled with consistent dollar cost averaging, and taking advantage of superannuation, you'll be on a path to FI in no time.

Other paths may get there faster, and there is probably a maths answer to your question with degrees of probability of success.
I'm just not sure you need to reach to succeed financially.

If you've got that offset ready it could be considered powder for when some opportunity arises in coming years.
Maybe the perfect IP, or a massive tank in the market etc...
You could capitalise on either of these inevitable events.
And it's not just sitting there contributing nothing. That $200k is currently earning you $6k per annum on a 3% mortgage rate:)

Cheers
Murdoch

Eeek! I know offsets are good, but if my investments are any indication, surely $200k invested in super of etfs would yield far more than $6k a year. It would be more like $3-6k a month.

[Murdoch]

Hi MrThatsDifferent,

At $3k-$6k per month on $200k investment, that's 18%-36% per annum.
It happens, but isn't the norm over the long term.

My point was that it's not $200k in cash sitting idle. It is saving OP further outlay in interest payments which she can invest elsewhere.

Murdoch

[Gremlin]

I'm a big fan of maxxing out an offset account if you're a high income earner.

If I have $200k at 3%, then it costs me $6k per annum.  But if I'm in the highest tax bracket, I need to earn just under $12k gross to pay that $6k net.  That's a 6% effective gross return, risk free.  I should get better than a 6% gross return long term from shares, but the volatility of that means it's hardly a risk free investment.  You're having to accept a *lot* of volatility for that extra incremental return.  The effective tax free nature of the offset account distorts the fair trade off between incremental risk and reward for most high income earners.

How big is your home loan?

[jk5954]

Another option would be to use the amount you have in the offset to begin debt recycling.

Not sure of the features of your home loan but you would need to be able to make a split loan of the amount you are wanting to debt recycle. Then "ALMOST" pay off the split and redraw the money to invest in income producing assets, i.e. shares. This split then becomes tax deductible.

This article goes into it in a lot more detail:
https://strongmoneyaustralia.com/debt-recycling-ultimate-guide/

[Murdoch]

Gremlin, I hadn't thought of it that way before and it's a fresh take.
Can you flesh out an example of the effective tax distortion as I'm struggling to get it right in my head.

OP, I'm not trying to hijack your thread. Sorry.
If I need to ask more questions on this aspect I'll start a new thread.

Cheers
Murdoch.

[Gremlin]

Sorry - haven't been around much lately.

This is the way I think of it.  I like to think of GROSS of tax, as usually these decisions impact at my marginal tax rate, not my average tax rate..

I can get a risk free rate of about 1%pa in a HIOSA.  This equates to 1% gross of tax.

Let's say I can get 8% from shares on average, being 4% average CG and 4% Dividend Yield.  Let's say that just under 60% of my shares are fully franked (it's probably a bit more, but then I get nice round numbers) and I'm not selling my shares.  Therefore, my gross of tax return on my shares might be 9% (4% CG, 4% Yld, 1% Franking Credit).  Arguably it's a bit better than that because I'm delaying paying tax on that CG component, but that bit remains the same regardless in both scenarios.

So let's say there's an 8% average uplift in return over the risk free rate for which I might accept 20% volatility.

If instead, I have a mortgage on my PPOR with an offset account and my mortgage rate is 3% and I'm in the top tax bracket, then any $ I squirrel into my offset account offsets at 3% after tax, or roughly 6% gross of tax.  Like the HIOSA, it's effectively risk free.

I could instead choose to invest that $ in shares.  The volatility of the shares is still 20%, but now I'm only getting 3% average uplift in return over the gross risk free rate.

On average, I'd still be ahead investing in shares, but I'm shaving a lot off my incremental return for no reduction in volatility.  And with that much reduction in incremental return, there's a lot more scenarios where I'm behind than ahead.

[marty998]

Another option would be to use the amount you have in the offset to begin debt recycling.

Not sure of the features of your home loan but you would need to be able to make a split loan of the amount you are wanting to debt recycle. Then "ALMOST" pay off the split and redraw the money to invest in income producing assets, i.e. shares. This split then becomes tax deductible.

This article goes into it in a lot more detail:
https://strongmoneyaustralia.com/debt-recycling-ultimate-guide/

This is the right answer.

[MustacheAndaHalf]

Interactive Brokers offers 1.58% margin loans, which could boost returns provided you don't get greedy with it.  If you borrow 1/4th against your assets ($12.5k out of $50k), it's fairly safe even if 2008 strikes again.  But people who try 2x to 3x should expect to lose all of it during a crash.

There's also ETFs with leverage built in, which tends to be more cost effective and better at limiting your losses.  The most famous I know about is UPRO, with 3x U.S. S&P 500.  Instead of borrowing $12.5k on margin, you could buy $4.2k of UPRO.
 UPRO has a lower expense ratio than a margin loan, and you only need 1/3rd as much of it.  So that would be my vote - buy a very small amount of leveraged ETFs.