Help your clients borrow to grow

5 min read

Anyone with a business loan or home mortgage will know that borrowing to purchase a quality asset can be an effective way of building wealth. Put simply, borrowing gives your clients more funds to invest which means greater exposure to the underlying asset and potentially greater returns.

The aim of borrowing to grow is to achieve a return on investment that is greater than the after-tax cost of the loan. If your clients are looking for yield and growth, portfolio diversification or potential tax efficiencies, borrowing to invest could be a suitable strategy.

Overview

Borrowing to grow is typically best suited to growth assets like equities, where after tax returns are more likely to be greater than the cost of servicing debt. That’s why gearing into generally lower returning fixed interest and cash assets is much less popular.

The diagram below illustrates that the equity asset class has achieved higher annualised returns than fixed income and property securities over the long term.

Advantages to borrowing to invest in equities

There are specific advantages to borrowing to invest in equities as part of a well-considered investment strategy:

  • There is no need to liquidate other assets to increase your client’s exposure to the share market.
  • Having more to invest allows your client to increase diversification. By avoiding overexposure to a particular market or security they can reduce their risk.
  • Their interest payments are potentially tax deductible and having a larger sum invested means they can generate more dividend income and be potentially entitled to receive any attached franking credits (subject to certain conditions).

Risks

The associated risks mean borrowing may not be appropriate for all investors. For example:

  • There is the potential to magnify losses.
  • The value of securities may not go up, or if they go up, the increase in value may not be sufficient to cover the costs of the investment.
  • Investors need to ensure they can fund their obligations under any loan (including the payment of any interest, fees and charges).

There may be ways to help manage these risks. Important considerations include being sensible about the amount of debt you take on, assessing the relative merits of the asset you’re purchasing or investing in and understanding the risks and likely returns involved.

Who would a borrow to grow strategy suit?

Investor Need Strategy  Solution
  • Need to generate higher levels of income from existing portfolio
  • Want opportunity for higher income, beyond Term Deposit and Cash
 Yield  Create positively geared investments by using moderate leverage to enhance yields over a portfolio.
  • Underfunded financial goals including planning for retirement
  • High cash flow, low equity
  • Tactical view of a specific stock/s
 Growth  Use borrowed funds to invest more, creating opportunity for higher capital return.
  • Maintain existing holdings and unlock capital without triggering a Capital Gains Tax (CGT) event
  • Seeking to diversify a portfolio with limited available capital
 Diversification  Draw down funds from a margin loan and use your existing portfolio of shares as security against the loan to diversify your portfolio.
  • Clients seeking to invest more tax efficiently may be entitled to cliam interest as a tax deduction to the extent borrowed funds are used to acquire assets for the purpose of deriving assessable income
 Potential tax efficiencies  Fix an interest rate AND prepay up to 12 months of interest in the current financial year. Potentially claim the prepaid amount as a tax deduction in the current year (if eligible).


How to open a BT Margin lending facility?

  1. Request the application pack containing the Facility Agreement and related product collateral by calling us on 1800 816 222, or download the form at the bottom of the page.
  2. Ensure the application form is completed and submitted.
  3. Subject to approval, your facility will be opened.

For more information contact BT Margin Lending on 1800 816 222 or email us at
client.marginlending@btfinancialgroup.com

How to open a BT Margin Lending Facility as a Wholesale Investor

Investors qualify as a Wholesale Client if they can provide us with a copy of a certificate issued by a qualified accountant (as defined in the Corporations Act) that states the investor:

  1. Has net assets of at least AUD 2.5million; or
  2. Has a gross income for each of the last two financial years of at least AUD 250,000 a year.

Visit www.bt.com.au/investment/products/bt-margin-loan/wholesale.asp for more information on how to open a BT Margin Lending Facility as a Wholesale Investor or call our BT Premium Equity Relationship Managers on 1300 365 591 during business hours.

Buying Westpac Instalment Warrants

  • On the ASX - You can buy Westpac Instalment Warrants on the ASX.
  • Cash application Your client can complete the application form in the PDS and submit it to you or directly to us.
  • Security holder application - To convert existing shareholdings into Westpac Self Funding Instalment Warrants (Westpac SFIs) (if available) have your client complete the application form in the PDS.
  • Rollover application -Rollover existing Westpac SFIs into a new series of Westpac SFIs over the same underlying securities (if available).
  • SMSFs - SMSFs can generally only acquire Westpac SFIs through a cash or rollover application or directly on the ASX.
Our Business Development Managers are here to help
Investment strategies 27 Apr 2018
All investors want to grow their capital, but the high growth associated with investing in equities is accompanied by increased risk exposure. The protect-to-grow strategy uses a Protected Equity Loan (PEL) to leverage the growth potential, with some potential tax benefits, while providing capital protection at a point in time (eg at maturity of the investment loan).
8 min read
Investment strategies 27 Apr 2018
The invest to grow strategy shows how investing in equities can be an effective long-term investment. The strategy considers the differences between SMAs and IMAs from a client perspective, and outlines the benefits of using a BT Managed Account.
5 min read
SMSF Strategies 27 Apr 2018
This guide outlines some of the ways you might benefit from an SMSF but also some of the key things you need to consider before establishing one and moving your benefits over to it.
PDF 773 KB