The Australian sharemarket posted a solid performance in 2013, with double-digit returns, something which may tempt many investors back into the field. Still, when it comes to investing your existing assets – and particularly borrowing to invest – the future is what matters.
Margin Lending: A back-of-the-envelope example *
How much would your portfolio have to increase in value for you to make a profit?
To answer this, we make some assumptions:
- You pay a typical current interest rate on your margin loan of 7.5%
- You pay your interest in advance, offsetting tax at a 37% rate applicable to those earning between $80-180,000.
- You have invested $50,000 of your own money.
- You also have a margin loan of $50,000.
- This gives you a loan-to-value ratio (LVR) of 50%.
Based on the above assumptions, your upfront interest payment would be $3,750, saving you $1,387 in tax. Net loss so far: $2,363.
With a 50% LVR on a $50,000 margin loan, your portfolio size is $100,000. In order to break even your portfolio would need to increase by just under 2.4% in value.
This excludes transaction costs every time you trade and dividend yields. Calculating the extra trading costs and dividend tax implications will likely increase the break-even point of your portfolio slightly. Even so, the end result is likely to be a 3-4% growth in order to leave you in profit.
* The above is a hypothetical example only and does not take into consideration individual circumstances. It should not be used for personal advice. Please consult your accountant or financial planner instead.