A traditional
wealth creation strategy used by New Zealand investors has been to gear into
property. Gearing simply means
borrowing money to invest. Over time
your investment has the potential to grow in value over and above the cost of
borrowing.
Leveraged Equities Finance Limited applies this same principle and offers investors
the means to gear into the sharemarket by lending against your existing
portfolio. This is known as margin
lending or leveraging. Put simply, our
money and your shares (or fixed interest securities) enable you to take advantage
of investment opportunities as they arise.
For example A client has $30,000 currently invested in Company ABC Limited. The following table
illustrates how their leveraged portfolio has increased in value with different levels of gearing.
| |
Ungeared |
Geared (50%) |
Geared (70%) |
| Initial Investment |
$30,000 |
$30,000 |
$30,000 |
| Margin Lending |
|
$30,000 |
$70,000 |
| Total Initial Investment |
$30,000 |
$60,000 |
$100,000 |
Leveraged Equities lends a percentage of the market value of each share and this is known as the
margin lending ratio or MLR. Different investments have different MLRs.
To work out the maximum to which you can "purchase" the following formula is used:
A deposit of $30,000 will enable you to purchase $100,000 of ABC Limited with a Margin Lending Ratio of 70%.
If your deposit is in the form of cash, you borrow from Leveraged Equities $70,000 ($100,000 - $30,000).
If your deposit is in the form of shares, you borrow from Leveraged Equities the full $100,000.
| Scenario 1 |
Increase of 10% Capital Growth |
| Increase of 10% on initial investment |
$3,000 |
$6,000 |
$10,000 |
| Value of investment |
$33,000 |
$66,000 |
$110,000 |
| Return on Initial Equity |
10% |
20% |
33% |
| Scenario 2 |
Increase of 15% Capital Growth |
| Increase of 15% on initial investment |
$4,500 |
$9,000 |
$15,000 |
| Value of investment |
$34,500 |
$69,000 |
$115,000 |
| Return on Initial Equity |
15% |
30% |
50% |
This example illustrates capital growth only. Brokerage and interest charges are not included.
In
addition
to potential gains in share prices, leveraging can increase earnings through dividends and income credits
providing an income stream to offset interest charged to your margin lending facility.
What type of finance is
available?
A margin lending
facility with Leveraged Equities will allow you to drawdown funds in New
Zealand dollars and Australian dollars. This will allow you to participate
in both New Zealand and Australian investment opportunities. In addition,
you will be able to draw down available funds on either a fixed or
floating rate basis.
You can elect to fix the interest rate for
advances over $100,000. You can choose to fix the rate for different
funding periods, for example three or six months.
Once you have decided what amount and funding
period you choose for your fixed rate advance, we will advise you whether
we are willing to make the advance, and the interest rate applicable. You
must then confirm whether you accept that interest rate.
Securing your loan
The
investments which you wish to borrow against or new investments you make
will be held as security against your margin lending facility.
To do this ownership of the investments is
transferred into the name of Leveraged Equities Finance Limited. Upon
repayment of any outstanding balances, ownership will be transferred back
into your name at your request.
You may sell any of these investments through
your broker at any time. The proceeds will be credited to your account
with Leveraged Equities. Securities held by Leveraged Equities are still
available to participate in all dividend and interest payments.
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