Introducing the Protected Loan
Commonwealth Bank offers a fixed-term Protected Loan that allows you to borrow money to build a share portfolio for yourself or your self-managed super fund (SMSF). Now available under The Options and Lending Facility, the Protected Loan could help you to:
1) invest with a level of protection at maturity
2) diversify an existing share holding and manage risk
3) borrow to invest tax-effectively
4) gear without margin calls
5) receive dividends and franking credits
6) gear within your SMSF
The Protected Loan also gives you the flexibility you need to create a geared portfolio tailored to your investment strategy. For example, you can choose the gearing and protection level; investment term; frequency of interest payments; and, of course, the shares in your portfolio, to ensure that it meets your individual investment objectives.
During the term of the loan you will receive any ordinary dividends and franking credits generated by your shares. By borrowing to invest, you can build a larger portfolio, potentially generating a larger income stream.
At maturity of the loan you will receive the benefit of any capital growth in your portfolio over the investment term. But if the value of your shares has fallen below the protected price, you simply hand the shares back to Commonwealth Bank at the original protected price.
Who can invest in a Protected Loan?
The Protected Loan is available to individuals, companies, trusts and SMSFs. In fact, this is one of the few ways an SMSF can borrow to invest.
Important facts about the CBA Protected Loan
| Shares |
|
| Loan Term |
You can choose terms of 1, 2, 3, 4 or 5 years, or choose a particular maturity date
|
| Gearing / Protection Level |
Between 50% and 100%
|
| Minimum loan amount |
$25,000, investing at least $5,000 per share
|
| Interest Rate |
Fixed or variable
|
| Interest payments |
Payable annually in advance or monthly in arrears
|
| Tax benefits |
Yes, a certain amount of interest payments may be deductible |
| Margin calls |
No |
| Dividends and franking credits |
Yes, if the shares chosen issue dividends and franking credits
|
| Type of loan |
Limited recourse
|
|
Interest in Advance Loan
|
If you are investing for yourself, rather than through a SMSF, you can borrow your first year’s interest with an Interest in Advance Loan
|
Costs
When you take out a Protected Loan, you are charged an establishment fee, as well as interest on your Protected Loan and a Protection Premium. The interest rate is different for every Protected Loan and is affected by a number of factors, including:
· whether you pay a fixed or variable rate
· whether you pay annually in advance or monthly in arrears
· the term of your loan
· whether you pay the Protection Premium upfront or over the life of the loan
· the volatility of the shares which make up your portfolio
Please refer to the PDS for more information on costs.
Interest deductions
The Australian Tax Office allows a certain amount of interest to be deductible in relation to your Protected Loan. The ATO deductible rate is determined by:
· Reserve Bank Bulletin Indicator Lending Rates for Standard Housing Loans plus 1% (currently 8.30% p.a.);
and
· the interest rate you are paying on the loan.
A common strategy implemented by individuals taking out a Protected Loan is to pre-pay 12 months interest before 30 June. This means that this interest amount can be claimed in the year the interest was paid (up to a certain level). SMSFs are unable to pre-pay interest, so to get the most deductions in any one year, the most timely month to invest is July, with interest deductible the following June.
For more information
The Product Disclosure Statement outlines further information in relation to a Protected Loan investment, including the associated risks and costs. You can
Download the PDS or you may request a copy by
mail.
Alternatively please call the Direct Funds team on 13 15 20 Monday to Friday between 8am to 5pm (Sydney time)