Nice article Dave. Am I allowed to share a facebook group link? It’s a fans page for NAB equity builder. Feel free to remove if you like.
August 17, 2021
With interest rates extremely low and the sharemarket rising, people start wondering if they should borrow to invest in shares and increase their portfolio even faster.
After all, more investments means more gains, right?
Well yes, but it’s not quite that simple. In this article, we’ll discuss:
Here’s why you might be interested in taking on some debt to increase your share portfolio.
Here’s where many people get it wrong.
They say “my interest rate is 4%, and my tax rate is 37%, so my investment loan is really costing me 2.5% because it’s tax deductible.”
This would be correct if you earned zero income from your investments. But in that case your interest won’t be deductible because you can only claim interest expenses if the debt has been used to produce income.
Here’s the ATO’s statement regarding ‘dividend and share income expenses’:
“You can claim a deduction for interest charged on money borrowed to buy shares and other related investments that you derive assessable interest or dividend income from.”
“Only interest expenses incurred for an income-producing purpose are deductible.”
You borrow to invest. Your investment pays some income, while ideally growing in value. At tax time, you declare your investment income as ‘income’ and the loan interest as a ‘deduction’.
If the income earned is more than the interest paid, you’ll actually pay more tax. If there’s a cashflow loss, that’s when you may end up with a tax refund. Just like a property investment.
Say your interest rate is 3%, and you’re earning 3% in income from your investment, your tax return is…. zero. Because your investment income = interest costs.
In this case, your cost of debt is still 3%. But that’s only income, we’ve also got growth. So let’s see how the maths stack up over a 15 year period.
This strategy only makes sense if your total return after tax will be higher than your interest costs. And that ‘profit margin’ should be decent, because why take a large risk for a small gain?
Say you borrow $100,000 to invest into shares. Using some simple numbers, let’s assume your interest rate is 3% and your long term return will be 7% per year, made up of 3% income and 4% growth.
In this case, you generate a yearly profit margin of 4% on the borrowed money. Yes, returns might be higher, but interest rates might be higher too. Feel free to use different numbers.
Since income equals the interest paid, there’s no tax owing, nor do you get a tax refund. And of course, growth on your shares is untaxed until sold.
So it’s a simple equation: $100,000 invested for 15 years at a return of 4%. A simple compound interest calculator tells us our end balance is roughly $180,000.
For every $100,000 of debt, you’ll make an extra $80,000 over 15 years. Definitely not bad, but not mind-blowing either.
With a longer timeframe and more debt, the more those additional gains multiply. Now let’s look some of the options available for borrowing to invest.
With this method you use some of the equity in your home to invest in shares.
Say your home is worth $500k and your mortgage is $300k. You could apply for an additional loan of say $100k to invest with, provided you meet the bank’s lending critera etc.
Of course, you might want to consider using a debt recycling strategy too.
Make sure this new loan is separate from your current home loan so that you can easily record the interest each year for tax purposes. You can do this either with your bank or by getting a mortgage broker to help you set it up correctly.
You then send this cash to your low cost brokerage account, and buy your chosen shares. Using home equity to buy shares (compared to other options) has a few benefits.
You have much more control, with basically zero chance of a margin call. The interest rates are much cheaper. And you don’t need an existing share portfolio to get started.
Keep in mind you’ll need enough spare cashflow to pay the mortgage each month as dividends are usually paid every 3-6 months. And ideally, this new loan will be an interest-only loan.
This helps keep your repayments low so you can direct more cash to additional investments or paying down your remaining non-deductible home loan.
If you’re a beginner, I strongly recommend you start slowly, rather than dumping a large chunk of money into the market at once.
Another common way of borrowing to invest is using a margin loan.
The good thing about a margin loan is your home and investments remain completely separate. You borrow against the value of your shares rather than your home.
The downside is, rates are much higher than when you borrow against property – usually 5-7%. The lender also has more control and the loan-to-value ratios are more strict.
If the market falls, you might be ‘margin called’, meaning you’ll be asked to tip in more cash to reduce the size of your loan, or the lender will sell some of your shares to reduce the debt.
With a home loan, as long as you keep up repayments, the bank isn’t going to care whether your shares are up or down – in fact, they won’t even know. If going the margin loan route, keep your LVR low (say 30%) to avoid this risk.
One of the cheaper margin loan providers in Australia appears to be a firm called Leveraged, which is backed by Bendigo & Adelaide Bank. Their ‘direct investment loan’ comes with a rate of just over 4% (at time of writing).
Bell Direct also provide margin loans for less than 4% – see here.
Just to be clear, I haven’t used these myself or thoroughly researched the products, so these aren’t recommendations.
I’ve also heard of people getting margin rates around 4% from banks, by shopping around and negotiating to see who really wants new business.
This one has become a popular choice in the last few years. NAB created a special margin loan called NAB Equity Builder, which works kind of like a home loan, but for shares.
You borrow some money, contribute some of your own, and agree to make principal & interest repayments each month like a mortgage. By committing to these repayments, NAB say there will be no margin calls.
Loans start at $10,000 and you simply need a cash deposit to get started or a share portfolio to borrow against.
The interest rate is currently quite low at just under 4%. While all this sounds pretty good, NAB are the only one offering a loan like this (as far as I know).
That means they have a fair bit of power to change the rules, jack rates up, and so on, knowing you can’t get the same thing elsewhere. That may seem pretty unlikely, but it’s still something to consider.
No. Just, no.
The rates on these types of loans are still mostly in the ridiculous range of 7-10% or more! You will be doing well to simply break-even with an interest rate that high.
If you can’t access any of the options above for whatever reason, just keep it simple and work on your savings rate.
Interest rates won’t be this low forever. If rates rise 1%, 2% or more, how does that change your strategy?
Without debt, you’ll barely blink. By investing with borrowed money, you’ll be acutely aware and feeling less comfortable with each rate increase.
You’ll quickly resent having to make loan repayments if you’re not making gains, or worse, sitting through nasty losses. Leverage can quickly turn a simple investment plan into a miserable experience.
When your investments fall in value, your debt remains the same. So your equity is shrinking before your eyes. Most people have enough trouble coping with market downturns as it is. Adding debt makes it even harder.
Using leverage to juice your returns looks fantastic on a spreadsheet. But in the real world where things don’t go up in a straight line, it’s not so easy.
When taking on extra debt to invest, you need to meet the repayments. For this reason, some people go for shares where the income they receive will be higher than the loan interest.
This is much easier psychologically, and practically, because you’re not having to dip into your own income to cover the shortfall, and you’re even getting some positive cashflow.
On the other hand, lower yield higher growth investments are more tax effective since you can potentially claim the cashflow-loss as a tax deduction. Plus lower yield options (like global shares for example) tend to give you greater diversification.
There are pros and cons to both options. You can always choose a nice middle ground, where you aren’t warping your investment plan to either chase high yields or optimise for tax.
It’s best if you can invest using debt the same way you would if no debt was involved.
Using debt to magnify your returns can work well if you’re still working. But when you’re looking to step off the hamster wheel and cruise into a state of independence, debt can be tricky.
Say you’ve got an investment loan charging you 4%. If your investment portfolio is producing 3% income each year, it’s actually eating into your available cashflow to live on.
Now sure, your portfolio is hopefully growing in value, but keeping that debt around arguably puts you in a less certain, less enjoyable position.
You’re also more affected by interest rate rises eating into the returns you can use to live off. Having negative cashflow investments in retirement is not as fun as having dividends hit the bank and knowing it’s all yours! 😉
On balance, borrowing to increase your investments usually doesn’t fit well if you’re wanting to reach financial independence in around 10 years or less.
As I’ve said before, with a good savings rate you don’t need leverage to build wealth or retire early.
Using low cost debt can definitely be useful in long term wealth-building. And I remember the feeling of wanting to juice progress as much as possible, so I would definitely consider using leverage to increase our share portfolio.
But I also see the appeal in running your finances in a more relaxed way with no debt whatsoever. Borrowing to invest is taking on more risk, which may or may not pay off depending on your investments and your timeframe.
Whether it fits with how you want to invest… that’s for you to decide.
Would you consider using low cost debt to invest in shares? Let me know in the comments. And if you already have, tell me how the experience has been 🙂
Home loan recommendation: If you’d like help with accessing home equity, refinancing or anything home loan related, check out my personal mortgage broker – More Than Mortgages. I’ve worked with Deanna and her team for many years and they’ve been fantastic.
Note: this blog may receive a referral fee if you use MTM. I only recommend things I use myself and genuinely believe in.
Nice article Dave. Am I allowed to share a facebook group link? It’s a fans page for NAB equity builder. Feel free to remove if you like.
Thanks for that Pat.
Are there any non- FB groups where I can glean some insight on NAB EB Pat? I’m not on FB but like using my facility and wanted to find other fans. The other places I see the topic pop up is on r/fiaustralia or r/ausfinance.
What I’d like is for NAB to increase maturity on loans from 15yrs to 20+yrs similar to a home loan and provide better cash flow solution and more importantly match a long term investor’s horizon.
It’s funny most people have no problems borrowing hundreds of thousands of dollars to invest in property but shy away from leveraging into shares. If you have a long time horizon and are investing into a low cost diversified portfolio, and do not panic sell when market has a downturn, I don’t see any problems in borrowing to buy shares.
Thanks for the article Dave.
Just wanted to get your opinion on my situation.
So I have fully paid mortgage – in an offset account – do I just not touch this or should I invest this in VDHG or something like that? Bit confused.
definately get some advice from an accountant – on offset is treated totally different to a loan redraw with regards ability to claim the interest as with an offset you arent actually borrowing the money.
RE margin rates, IB have super low rates but aren’t suitable for non ‘sophisticated’ investors, their offerings for normal people cap out at 25K. Bell direct margin rates are better then leveraged and
NAB EB if you borrow more then 500K, IE 3% if you are borrowing 2M or more.
I don’t personally use margin loans as the risk is too high, but there are better rates then what you have outlined in the article.
We have borrowed against our house and use NAB EB, this has put us in a position to retire much sooner then if we didn’t use leverage, so I’m not sure how you came to the conclusion that if it’s under 10 years it isn’t ‘worth’ it. Didn’t you leverage into 53 houses to achieve your FIRE?
A good read Dave! Thanks.
That interest rate risk – the risk of interest rates increasing through the loan term, and that impacting the investment assessment is a really key issue.
As an example, the Federal Government in its Intergenerational Report tests scenarios of public finances if interest rates go up around 4% from here. I think potential leveraged investors would be wise to do the same, at minimum, to understand what could happen to repayments!
I use the NAB Equity Builder and have only just really got it going. I found the setup relatively easy and the NAB help really good. I keep my exact same investing style, but i have the value straight away.
So i used to invest exactly 2k per month. With the NAB EB, I took 72k over ten years. The benefit is exactly 2k still leaves my account every month. This is in 3 transactions.
1. Principal repayment
2. interest repayment
3. Additional bank transfer to make total 2k.
Therefore, the loan will be paid off close to the 3year mark and my cashflow is identical. (all investments are on DRP).
So far very happy with the product.
Hi Chuck, is it possible to dollar cost average in using the NAB equity builder or do you have to use all the borrowed funds in one transaction? TIA
Do you mind if I chat with you through email about your experience with NAB EB? I’m currently looking to set one up for myself and would love someone who had already done it to bounce ideas off.
Great timing if this article. I am so debt adverse it’s not funny, however had been thinking of a margin loan. But we do want to retire within 10 yrs and this article has made me think that it’s ok not to take on that risk and just keep saving n investing, saving n investing.
Hi Dave. Great article mate.
I’ve been using NAB EB & have found the experience to be pretty good. I started borrowing from NAB with a small loan of $150k in 2019. Once the Covid crash hit I was comfortable with taking on more risk & jumped straight in increasing my loan with NAB EB to $580k with another $70k of dry powder ready to go. I stuck to my regular DCA per month but just increased the purchases to somewhere between $45-70k purchases. It has helped take my share portfolio from $0 in 2017 to $1.18m. I do expect rates to go up over time but not significantly for a while & by that time I’ll have the debt paid off as my good savings rate as well as dividends from the portfolio & the tax incentives will help me pay the loan off in full in a little over 4 years. I have also used a personal loan to buy shares. The interest rate has less bearing the quicker you pay it off so can be a good option if taking advantage of a good opportunity but will obviously come at the cost of higher interest in the short term. Having a solid plan & being comfortable with market volatility is a must. For some context we have a high savings rate on high income & no mortgage. We don’t mind paying a little more in tax now knowing we will be paying $0 in tax when we do choose to retire in a few years when the debt is gone & for a very long time in the future. Also worth noting is we haven’t found having the debt to be burdensome or complicated in anyway. Definitely depends on the person, their plan, their conviction in what they’re doing, ability to meet loan requirements etc. I just think of it purely as a mortgage except when this mortgage is paid off it will find our lifestyle for the rest of our lives. Also when we do pay it off we’ll keep the loan facility open because I’ll be taking advantage of future downturns in the same way.
I used the JBWere Equity Builder, the grand daddy of the NAB EB, to build an investment base when I was younger. Leveraged into several managed funds (in the days before ETFs).
Now I’m a retired I use the Betashares GEAR leveraged ETF. No margin calls, and they borrow internally at a wholesale rate I couldn’t match with a retail loan. And it gives me enhanced dividends to meet living expenses. So far very happy.
Great post as always Dave.
I’d be curious to know what you think of Interactive Brokers (‘IBKR’) margin facility. I have heard they have very low interest rates (possibly as low as 1.5%?) but possibly the amount you can borrow is capped at something like 25k.
Mr Money Moustache wrote a post about IBKR’s margin loans here which was what piqued my interest: https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
I’m thinking about getting my feet wet this year with either NAB Equity Builder or IBKR option, what do you think?
FYI Doesn’t look like Nab Equity Builder are allowing new applications ..
“New applications for NAB Equity Builder are currently not being accepted
If you’d like to apply, please complete the Expression of Interest form and we’ll notify you as soon as NAB Equity Builder online applications are open. Timeframes can’t be provided at this stage but our teams are working hard to allow new applications as soon as possible. Thank you for your patience and understanding.”
Interesting article which resonated with my recent past. I had a low interest loan set up for doing just this after we paid off our mortgage. My reasoning was that if the market ever really crashed I would use it to make a large investment and treat it almost like purchasing an investment property. Truth be told though, I’ve had this setup for 6 years and still not touched it. During the Covid crash I found myself wondering more about job security and using the loan felt like creating extra stress and starting a new mortgage when I had the choice not to.
I ended up putting extra cash in to the market in the dip using the GEAR ETF which i found to be a good compromise. Take the punt on leveraged growth during a market crash, but not take on debt to do so. I wouldn’t buy any more units in it with markets at all time highs, but plan on holding it for 20 years plus now and buying unleveraged ETFs every month now when prices are ‘normal/high’. I use the dividends from GEAR to buy normal ETFs so it slowly becomes a smaller part of my portfolio.
Thanks Dave – great, balanced, and well considered post. Our house is paid off and I have been toying with debt recycling option, but your article gives me permission to trust my gut, which was saying “why take the risk?” At the end of the day, the potential benefits in terms of our wellbeing are not as great as the potential costs in terms of stress, regret etc. keep up the great work – love the website and the podcast!
Thanks for the article Dave.
I am curious about the difference between investing using home equity, and debt recycling. By my reckoning, once you have paid down debt in order to debt recycle, you are essentially following the home equity approach in your article above.
Yet, ‘debt recycling’ is usually considered a more beneficial approach than the home equity approach. E.g. on my reading your debt recycling article is more positive to the approach than this article is to using home equity to buy shares.
Or am I missing something?
(Hope that makes sense)
Over most of my share investing experience, I use a normal Margin Loan (currently with NAB) to avoid PAYG upfront tax instalments payments on my passive dividend income.
I try to keep my gearing level down to between 20-40% of the share portfolio compared to an Loan to Valuation Ratio (LVR) of 80% so I don’t have to worry about a margin call, without having to pay the higher interest rate charged by NAB Equity Builder product.
I just fixed my loan at 2.05% pa fixed for 12 months payable in advance each year to refinance my share portfolio that yielded a gross 9.25% pa in 2019-20 based on my historical cost price.
Hence, I have a positively geared share portfolio that funds my FIRE lifestyle and throws off enough cash, so I can keep maxing out my annual tax deductible deduction to my SMSF.
When I reach 60 years, I have the option to cash out excess balance above A$1.7M tax free threshold to pay cash to buy outright my “Dream Home” in the location of my chosing.
As you rightly point out, achieving FIRE is a function of a high savings rate rather than the investment vehicle.
Instead of parking my savings in a geared investment property, I preferred the greater control and flexibilty of a positively geared share portfolio in combination with a SMSF.
Hi Dave, love your article. I have/am using an Equity Builder loan, and like a few of the comments was not able to get one last year.
For the people who can’t access it, you can still get one, and applications need to be sent direct to the equity builder team. The below address will get you through and allow you to apply. They just don’t want every man and his dog to apply; hence, that’s why the normal website is “blocked”.
Hi Dave, great article and thanks for your personal reply many months ago when I was contemplating this. Thought I’d share my strategy. I had over 50% equity in my owner-occupied home loan. As everyone knows, there are a number of very attractive refinancing options and also a lot more home loan products out there which include multiple offset or redraw accounts, some with no/minimal fees to establish or redraw/ deposit into. I managed to refinance for <2% home loan with x3 separate redraw facilities. 1 is my emergency funds account= 1yrs + living expenses 1 is an investment account and the last is the home loan which I also use for everyday expenses.
I looked at how much debt (P&I) I could comfortably service on all 3 aspects of the loan – including a possible interest rate rise. I decided that I could safely re-invest 25% of the equity built up & set up the max redraw amount to reflect this.
I used most of the “investment redraw” to buy LICs and index ETFs which generate some dividends, but also grow so I can tax deduct the interest on this component of the loan
I still work half time , so all my earnings goes into the various loans depending on the target reserve I want to maintain. Once I save up enough in the investment loan component again, I can re-invest when comfortable. Meanwhile, the money sits there and reduces interest repayment s owing on my home loan.
This strategy means it will take me longer to repay my hom loan, but I think I’ll still be able to pay it off eventually in the next 10- 15 years which is when I’d like. To fully retire if I want to (( I still like my work).
By doing the above, I am hoping to accelerate my investments and make the most of compounding, also have access to income when I retire as I still won’t have access to Super for another 10 years. It’s not quite debt recycling, but has similar principles
Its not a simple strategy, but I think it will help meet my long term goals faster with debt I can afford. If interest rates go up, I can just leave the money set aside for investments there to pay off the loan. Having emergency funds in a standard savings account also earns no interest these days, whereas this way it reduces my HL interest.
I read a lot- of this blog and others. also got advice from my accountant about how to set up the loan so that the interest on the investment loan can be calculated separately. I spent 6 mo reasearching loans myself to find something suitable.
Long post, I don’t normally share much, but have found the info provided due to the generosity of people like Dave very useful, so may be this will help others!
As always great article, I have a question if you could help me with, I want to borrow additional fund against my home, as its value has increased, to invest but it seems that the bank charges higher rate if it is for investment purposes, do I have to go with `investment` purpose? What is the consequence if I borrow for personal purpose with lower rate and still invest it, will it cause any problem for my tax refund even if the loan increase is fully separate?
One more comment :), I really liked this NAB Equity Builder, however the brutal fact about it is that NAB can remove the investment fund from the approved list any time and so the borrower has to sell all the shares and switch. Let’s say I borrowed and invested in VAS and the VAS price drops and so they see it as risky and remove it from the list, now I have to sell my shares with low prices probably with loss which theoretically could be even worse than margin call. Saying all that, I think I am willing to take the risk and borrow quite a big chunk of money, maybe 500K.
Hi, I’m 51 ( retired at 43 ) debt free retired have income from shares and 2 paid off investment properties + home. I’m about to borrow 300k and drop it in super knowing I can get it back tax free including it’s earnings at 60 with a 2.4% mortgage on the borrowings the out of pocket is very small compared to the 9-10% average return in super, can you see any downside ? Obliviously the mortgage isn’t tax deductible but as I’ve always said you can’t make it with both hands !
Keep up your excellent work! I have saved each and every one of your articles in case your blog goes offline!
What are your thoughts on using home equity (say $100,000 as per your example) to invest in the VAS ETF? I really liked your calculations, especially the bit where you say:
“Say your interest rate is 3%, and you’re earning 3% in income from your investment, your tax return is…. zero. Because your investment income = interest costs.”
This calculation does not take franking credits into consideration and VAS is 70-80% franked. You have also said in other articles that franking credits make investing in Australian shares (ETF’s and
LIC’s) very tax efficient.
So my question is this.
Say my interest rate is 4.5%, and I am earning 4.5% in income from VAS. How will this affect my tax return?
As you can probably tell I’ve just discovered your site today. I’ve spent basically all day on it I’m loving the content.
In relation to the NAB Equity Builder, since the rate is currently at 6.5%, would you say it’s not worth considering given most dividend yields are <5-6%? Interest rates look likely to continue rising and a recession might also be on the cards for 2023 so more market downside is probable. Seems that the only real time to consider this product is during periods of low interest rates but I may be missing something.
Ah yes of course through VAS. Yep makes sense.