NAB Equity Loan

Hi Sagar,

First, yes, if the portfolio is income producing (pays dividends or distributions), then yes, the interest is deductible.

And yes, if you expect a return of more than 8%, then this should be a profitable endeavor. But some things to keep in mind…

— 8% is a very high interest rate, and the nab loans are usually principal and interest, meaning the repayments will be quite high and can eat into your monthly savings quite a bit.

— Long term market returns for global/Aussie shares are somewhere around 8-10% or so, meaning there isn’t a whole lot of upside at current interest rates. You may outperform this, but you may also underperform it.

— Markets are volatile and there could be periods where you’ve invested say 100k using this loan and then the portfolio falls to 70k or less. While you won’t be margin called as far as I know, it will be a painful situation to be in. At that sort of time is when you should ideally be investing more, but due to the situation it may make you fearful and you end up wanting to pay off the debt, making it a less optimal outcome.

Cheers, Dave

Investing using a loan, such as NAB’s Equity Builder, can be an effective strategy for some investors, particularly if you’re looking at a long-term horizon of 8-10 years as you mentioned. This product allows investors to borrow money to invest in a range of approved assets, typically including major Australian ETFs, without using property as collateral. Instead, the portfolio itself serves as security.

Key Considerations:

1. Interest Rate vs. Return: You mentioned an interest rate of 8% and a target CAGR (Compound Annual Growth Rate) of 10%+. It’s crucial to ensure that the expected return on the investment exceeds the cost of borrowing. Keep in mind that while historical data might suggest that certain investments could yield a 10%+ return, market conditions can change, and returns are never guaranteed.

2. Loan Structure: The Equity Builder product is structured more like a mortgage than a traditional margin loan, with no margin calls. This can provide more stability as you won’t be required to top up the investment if the market value falls. However, it’s important to understand the full terms of the loan, including the repayment schedule and any potential penalties for early repayment.

3. Tax Considerations: Generally, in Australia, interest payments on loans used to buy income-producing assets can be tax-deductible. This means that if you are using the Equity Builder loan to invest in ETFs or other income-generating investments, the interest you pay on the loan could potentially be deducted from your taxable income. However, it’s important to consult with a tax professional to understand how these rules apply to your specific situation and to ensure compliance with all relevant tax laws.

4. Risk Management: Using debt to invest increases both the potential upside and downside. If the investments perform well, the returns can significantly exceed the cost of the loan. Howev

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