Feeling a touch more bullish? It may pay to wait until the next round of the ‘euromess’ unfolds. However, with interest rates low and dividend yields on some stocks still high, a positive gearing opportunity might be appropriate for your self-managed super fund (SMSF), especially now that there is a margin lending product designed specifically for SMSFs.

In a first, National Australia Bank has launched the ‘NAB Super Lever’, a product that uses the limited recourse borrowing arrangement (LRBA) structure required by SMSFs that want to take out a loan. Previously, standard margin loans have been off limits to SMSFs, and while super funds have been able to use self-funding instalment warrants to gear, this product has considerably more flexibility and is cheaper to use.

Why gear?

The textbook answers are: you can increase your investment returns by gaining a greater exposure to the market; you can reduce the individual stock risk in your portfolio by using the borrowed funds to buy other stocks and diversify; and, if positively geared, there are potential taxation benefits. Interest expense in the accumulation phase should be deductible, and while the dividends are assessable, your net tax position (taking into account the franking credits) will be better off.

Let’s look at an example by comparing an ungeared investment by an SMSF in accumulation phase of $50,000 in Telstra shares at $3.71, with a geared scenario where the fund’s investment exposure is doubled by borrowing $50,000 and investing a total of $100,000.

Geared and ungeared stock investment

Over the course of the first year, the geared strategy will generate an additional after-tax income of $925.

($5,509 – $4,584 = $925) 

The risk

Of course, the geared scenario has double the exposure to Telstra – so if the share price of Telstra falls, your fund will lose twice as much. This is the risk with any gearing strategy – you magnify your potential losses, and conversely magnify the potential gains.

The product

It is a margin loan with a few differences:

• The maximum amount NAB will lend (the facility limit) is 50% of the SMSF net value. So if your fund has net assets of $400k, NAB won’t advance more than $200K in total;

• Each loan is a separate transaction and covers just one parcel of shares. Within your facility limit, you can have multiple transactions or loans;

• It is limited recourse. This is a good thing and means NAB’s only recourse is to the actual loan security (the parcel of shares), not your SMSF. No personal guarantees are required from members (although you can lodge additional security in a personal capacity as a guarantor);

• Each security has its own LVR (loan to value ratio), which is the amount you can borrow of the total asset value. This is typically between 40% and 55% for shares;

• More than 100 shares and ETFs, and 100 unlisted managed funds are eligible;

• With a buffer of 15% and conservative LVRs, margin calls are possible – however in the main, this is unlikely. For example, if you invested in Commonwealth Bank (CBA) shares, which have an LVR of 55%, and you geared at 50% (NAB lends your fund half, your fund contributes the other half), the market would have to fall by 29% to trigger a margin call;

• Margin calls are managed at the individual loan (parcel) level and are met by paying cash (or selling the asset);

• The loans have no term – and can be repaid at any time; and

• NAB provides online access to your positions and loan details.

The costs

NAB charges an upfront fee of $250 to vet your fund’s trust deed. There are no other fees.

Interest rates as at 22 August (not all terms quoted) are:

Our view

It’s pretty hard to fault this product – it’s innovative and meets a need in the market, providing an easy and relatively safe way for SMSFs to positively gear into the sharemarket. If this product takes off, expect other margin lenders to follow suit, which may apply some competitive downward pressure to the interest rates and the application fee.

As always, read the product disclosure statement (PDS) and other documents, which are available at www.nab.com.au/superlever.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.