National Margin Lending. Make your investment portfolio work for you

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1 National Margin Lending Make your investment portfolio work for you

2 Contents What is Margin Lending? 3 Why choose National Margin lending? 5 Why gear? 6 How much can you borrow with National Margin Lending? 9 What happens if your investments fall in value? 12 Another option to consider 16 Your Tailored Facility 18 How does a National Margin Lending Facility work? 21 Gearing and tax planning 24 How to apply 25 Facility Terms Section Application Section 2

3 What is Margin Lending? How many times have you seen a great investment opportunity, but at the time lacked the free capital to take advantage of it? With margin lending this no longer needs to be the case. With margin lending you can take advantage of opportunities as they arise. You have the potential to use the equity you have in your current investment portfolio to invest more funds and multiply your opportunities to build your wealth. Margin lending provides you with a line of credit that allows you to use borrowed funds using your existing approved shares, managed funds or cash as security. Using these borrowed funds, you can purchase additional shares and/or managed funds. It gives you the opportunity to invest significantly more and provides access to a potentially greater range of investment opportunities, because you are not limited to using just your own capital. In this way, margin lending gives you the How does margin lending work? With National Margin Lending, you provide the initial capital by way of shares, managed funds or cash. Based on the type and amount of these securities, we provide you with the funds to build your investment portfolio providing you with the opportunity to grow your wealth, in a potentially tax effective manner. All shares, managed funds and cash are mortgaged to us as security for the Facility. The shares and managed funds you can provide as security need to be on our extensive list of approved shares and managed funds. As with any investment there are risks. Therefore it is important that you consider your financial circumstances and it is recommended that you talk to your financial or tax adviser, as to the suitability of a margin lending facility. opportunity to increase your capital base, boost your investment portfolio and become a more active investor in the market. 3

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5 Why choose National Margin Lending? Many people understand the long term potential of investing in shares and managed funds, but lack sufficient funds to make effective, wealth-generating investments. Opportunities may be lost because additional funds are not available. A National Margin Lending Facility allows you to borrow against your investments, (i.e. gear) to invest more, providing the potential for greater returns. Major features of a National Margin Lending Facility Competitive interest rates Minimum facility limit is $40,000. Only pay interest on the amount drawn* Instalment gearing available with a minimum facility limit of $20,000 No application or ongoing service fees refer page 19 for fee details Personal Account Manager service Borrow against an extensive list of approved shares and managed funds up to a maximum of 70% A range of interest rate options: Variable Fixed rate up to 5 years: pay interest in advance or arrears Variable & fixed rates combined in one facility Third party securities accepted Monthly statements. *Fixed rate loans are fully drawn upon commencement of transaction. For further details refer to Your Tailored Facility Fixed Rate Loans, page 18. 5

6 Why gear? Diversity and gains National Margin Lending allows you to gear your existing investment portfolio and/or available funds, to borrow additional funds to make further investments. With these additional funds, you are able to potentially invest across a wider range of securities. This can increase your opportunity to invest in shares operating across different sectors of the economy and, internationally, through managed funds. You are also able to diversify your portfolio and spread your exposure. National Margin Lending will lend up to 70% of your existing investment portfolio (provided that your investments are on our approved list of securities). However, it is up to you to determine the level of debt with which you are comfortable. Here s an example of how gearing can increase wealth: Joe has $60,000 invested in an approved managed fund and he wants to increase his returns via a gearing strategy. He is considering three options: Option 1: Maintain his investment at its current value of $60,000 Option 2: Double his investment by borrowing $60,000 (i.e. 50% gearing) or Option 3: Increase his investment to $200,000 by borrowing $140,000 (i.e. fully geared at 70% gearing). Value of investment after 5 years, after repayment of loan $150,000 $100,000 $86,857 $99,330 $115,961 $50,000 0 Option 1 No Gearing Option 2 50% Geared Option 3 Fully Geared Joe starts with $60,000 of his own money Assumptions: Return is 10% pa (split 4% income and 6% growth). The income component of the investment return is fully franked at 30%. Interest on the loan is 8% pa. Joe had a marginal tax rate plus Medicare levy of 48.5%. After meeting interest payments, any excess distributions and tax benefits are reinvested. After 5 years the total investment is sold, the loan is repaid and capital gains tax is paid. The above graph illustrates the benefits of gearing. The Fully Geared strategy (Option 3) has significantly increased Joe s net returns compared with a No Gearing strategy (Option 1). 6

7 The risks some points to consider As with any investment, margin lending involves some degree of risk. Risk management is an important part of any investment strategy and should be a prime consideration when building an investment portfolio, and when deciding to gear your investments. Market Movement While gearing can increase your opportunity for gains in a rising market, it can also magnify your losses when the market declines. If the market declines, so too may the value of your portfolio. Should this happen, you will need to ensure that the amount owing under your National Margin Lending Facility does not exceed the security value of your portfolio. Interest Cost Interest costs on the funds that you have borrowed can exceed the income you receive from your investments (particularly in an increasing interest rate environment), which means that you cannot rely solely on dividends or distributions to meet your interest costs. You need to consider how you will meet your interest payments. Margin Calls Margin calls can arise due to a variety of circumstances such as market movements or performance of individual securities. As margin calls need to be met within a strict timeframe, you need to consider this when deciding if margin lending is suitable for your individual circumstances. Personal Financial Circumstances Since everyone s financial position is different, there will be investors who are comfortable gearing their investment portfolio to the maximum level, as they are confident that they will have the capacity to meet their fully geared commitments. There will be other investors who are comfortable with a lower level of gearing and are happy to operate within those limits. As with any investment, the greater the gearing, the greater potential gains and losses can be. It s a question of tailoring your National Margin Lending Facility to your own personal financial circumstances and objectives. By being aware of your financial strengths and weaknesses, you can better manage fluctuations in the value of your investments and reduce the risk of a margin call. Accordingly, we recommend that you consult your financial or tax adviser to ascertain whether a National Margin Lending Facility is right for you. Before applying for a National Margin Lending Facility, please ensure that you have read the Facility Terms, the Application, and the Risk Disclosure Statement (contained within the Application), and that you understand how to operate a National Margin Lending Facility. 7

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9 How much can you borrow with National Margin Lending? How much can you borrow? The amount you can borrow is determined largely by the value of shares, managed funds or cash you provide as security from the National s extensive list of approved shares or managed funds. We apply a percentage known as the security ratio to the market value of each approved share and/or managed fund. The aggregate market value of each approved share or managed fund investment, multiplied by its respective security ratio, is known as the security value of your portfolio. Using your existing approved portfolio as security, you can borrow funds to purchase additional approved investments as security) is calculated using the following formula: Market value x Security ratio = (1 Security ratio) Example: If the market value of your existing approved portfolio is $60,000, with a security ratio for each security in it of 60%, you are able to borrow up to $90,000. This example assumes that the borrowed funds will be invested in approved shares and managed funds each with a security ratio of 60%. $60,000 x 60% = $36,000 = $90,000 (1 60%) 0.4 Total amount you can borrow approved shares and managed funds. The additional approved investments you purchase increases the amount you can borrow, because they will be used as security. As a guide, the total amount you may be able to borrow (when providing additional 9

10 The table below shows you the amount that you may be able to borrow based on the market value of the existing portfolio you provide as security, using this formula. Determine how much you can borrow * Market Value of existing portfolio 50% Security Ratio 60% Security Ratio 70% Security Ratio $40,000 $40,000 $60,000 $90,300 $60,000 $60,000 $90,000 $140,000 $80,000 $80,000 $120,000 $186,600 $100,000 $100,000 $150,000 $233,300 *This assumes that the borrowed funds are invested in approved shares and managed funds, which have the same security ratio as the assets in the existing portfolio. Borrow for any other business or investment purpose Using your existing approved portfolio as security, you can also use borrowed funds for any other business or investment purpose. For example, if A comprehensive choice of investments A list of National Margin Lending s approved shares and managed funds is included in the back pocket of this brochure. An updated list can be obtained from our web site: national.com.au or by calling you had a $60,000 portfolio consisting of approved shares and managed funds, you could borrow up to $36,000 (assuming all securities had a security ratio of 60%). These funds would be available for you to use for other business or investment opportunities. 10

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12 What happens if your investments fall in value? If the value of your investments falls the Facility will be affected. Therefore, it is important that you understand the buffer and margin call procedures described below so that you can structure your Facility accordingly. The Buffer National Margin Lending allows a buffer so that small fluctuations in market values do not result in a margin call. The buffer is a dollar amount calculated as the aggregate of 5% of the security value of each approved share and 10% of the How does a margin call position arise? A margin call position arises when the security value of your portfolio falls below the amount you owe under your Facility by more than the buffer. The security value to loan ratio (SVLR) for your portfolio should be maintained at or above 100%. In general terms, the SVLR is calculated by taking: a) the security value of your portfolio, and dividing it by b) the amount you owe under your Facility. security value of each approved managed fund in your portfolio. A margin call is only made when the amount you owe exceeds the security value by more than the buffer. Unless a margin call position arises, you are not obliged to take any action to restore the security value to loan ratio to 100%, though it might be in your interests to do so. Whilst you are in the buffer, you will not be able to draw down additional funds or make further purchases, and the chance of a margin call increases. 12

13 Here is an example of how a margin call position can arise due to a 10% fall in the market value of a share portfolio. 10% fall in the market value BEFORE AFTER Loan amount $100,000 $100,000 Market value $144,286 $129,857 Security value (assuming a 70% security ratio) $101,000 $90,900 SVLR 101% 90.9% Buffer (5% of security value) $4,545 Diagram 1: Before 10% fall in the market value Diagram 2: After 10% fall in the market value $150,000 $150,000 $120,000 $120,000 $90,000 $60,000 $90,000 $60,000 Buffer 100% 90.9% $30,000 $30, Market value Loan amount Security value Market value Loan amount Security value In Diagram 2, you can see a 10% fall in the market value of the share portfolio, places this Facility in a margin call position. This is because the security value of the share portfolio plus the buffer is now less than the amount owing, (i.e. loan amount). This position needs to be restored so that the security value is equal to or greater than the amount owing. This can be achieved by one or more methods described over the page. For example, if additional cash was going to be provided, the SVLR could be restored to 100% by depositing $9,100 into the Facility. 13

14 What to do if a margin call occurs If we make a margin call, you can undertake one or more of the following steps to restore your position: Reduce your loan amount or deposit cash into your cash management account. Sell some securities and apply the net sale proceeds against your Facility. Provide additional approved shares or managed funds as security. How long do you have to meet a margin call? It is important that you closely monitor the status of your Facility. If we make a margin call, you will be obliged to restore the SVLR to at least 100%. When we make a margin call, you have until 2.00pm (Melbourne time) the following business day to restore your position. However, if your portfolio comprises 95% or more (by market value) of managed funds, then the margin call period is No one wants to receive a margin call. You ought to have a strategy in mind from the outset for dealing with margin calls as values can fall rapidly and without warning. This strategy could involve one, or a combination of the following: Having access to additional funds. Having access to additional approved shares or managed funds. Creating a priority list of the part(s) of your portfolio you are willing to sell. In addition, you will also need to consider what would happen if you were to receive a margin call while you were out of the country or could not be contacted. One solution is to nominate someone, such as your financial adviser, to be your authorised representative who can act on your behalf. extended to 5 business days. 14

15 Reducing the risk of a Margin Call While having a plan to respond to a margin call is important, there are ways that you can reduce the risk of a margin call. These include: Not borrowing to the full extent permitted against your approved investments. In other words, do not gear your investment portfolio to the maximum level. By reducing your gearing by as little as 10% you can build in a significant level of protection. Diversifying your portfolio across a number of industry sectors and securities. With more to invest you can achieve a wider spread of investments, which may also result in better returns in the longer term. Making interest payments on the loan amount each month, i.e. don t capitalise the interest. Monitoring your portfolio on a regular basis. You need to ensure your portfolio is performing effectively and that your level of gearing is consistent with your personal financial circumstances and objectives. Directing dividends or distributions into your Facility. 15

16 Another option to consider Instalment Gearing Instalment gearing is another option available through National Margin Lending. It provides you Your income with the ability to invest in approved managed funds on a monthly basis using a combination of your own funds and borrowed funds through Your Bank Account a National Margin Lending Facility. This regular monthly investment structure provides you with: a convenient way to enter the investment market with a small amount of funds. After you provide the initial deposit to enter a managed fund, you can start building your investment with as little as $250 per month from your own funds. National Margin Lending Facility Fund manager invests into selected funds a way of avoiding trying to time your entry into the market. By investing regularly you don t have to worry about the peaks or troughs of the investment cycle, as you average your investments in the market. This can be a more reliable strategy than trying to time your entry into the market. the ability to start investing now. The sooner you start the longer your investments have to grow. Instalment gearing can only be used for the purchase of approved managed funds. 16

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18 Your Tailored Facility You can tailor your National Margin Lending Facility to your individual needs by using a range of options. The loan options available include: Loan amount The minimum Facility limit is $40,000 unless you only use instalment gearing. There is no maximum, however applications for more than $3 million are subject to special approval. Interest rate options Variable Rate. Fixed Rate paid monthly in arrears: 1 to 5 years. Fixed Rate paid yearly in advance: 1 to 5 years. Combination Loan A National Margin Lending Facility doesn t restrict you to just one loan or loan type. You may combine both fixed rate and variable rate loans within the one Facility, as long as the total of all loans is equal to the facility limit applied for and approved. For example, you may apply for a Facility limit of $100,000 comprising a variable rate loan ($50,000), a 3 year fixed interest rate in advance loan ($30,000), and a one year fixed interest rate in arrears loan ($20,000). Please note that for any fixed rate component of a combination loan, the minimum loan limit is $20,000. Fixed Rate Loans When you elect to fix the interest rate on a portion of your Facility, that component is fully drawn and the proceeds are deposited into a cash management account that is automatically opened in your name. This cash management account pays interest that is calculated daily and paid monthly. For interest in advance loans, you need to advise us by what means the yearly interest charge will be met, eg cheque. For interest in arrears loans, the monthly interest cost will be automatically charged to your cash management account, or any other account nominated by you. When buying and selling securities, and you only have a fixed rate loan, the funds are withdrawn (when buying securities), and deposited (when selling securities) from your cash management account. The balance in the cash management account forms part of the security for your loan. Variable Rate Loans For variable rate loans, interest will be automatically charged to the loan account unless you direct us otherwise. No regular repayments of the loan are required. When buying and selling securities, the funds are withdrawn (when buying securities) and deposited (when selling securities) from your loan account. 18

19 Instalment Gearing A National Margin Lending Facility can be set up as instalment gearing that provides you with the ability to invest in approved managed funds on a monthly basis. Features of instalment gearing include: A minimum Facility limit of $20,000 (initial minimum loan draw down of $5,000). A minimum of $250 each month from your own funds and a minimum loan contribution of $500 from your National Margin Lending Facility each month. A choice of managed fund(s) to invest in from our approved managed fund list. The choice of variable and fixed rate loans. The ability to switch managed funds and/or increase your contributions at any time that suits you. The convenience of direct debit for your monthly contributions. Please note: Fund manager minimum investment requirements may apply. Fees There are no application or on going service fees for individual or joint National Margin Lending Facility applications. For companies and trustees applying on behalf of trusts there is an establishment fee, which is detailed in the National Margin Lending Facility Application. No government fees and charges currently apply other than for applicants residing in Tasmania, who are subject to a State Government charge of $90.50 to cover stamping and registration of the Power of Attorney. A fee may be incurred for Instalment Gearing if certain circumstances occur, for example if you terminate the arrangement within the first 12 months. Early repayments of a fixed rate loan are not permitted without the prior approval of National Margin Lending, and may be subject to the payment of an economic cost and other charges. Accessibility Through the National s internet banking, telephone banking, ATMs and branch network you can view your Facility s loan and cash management account balances and recent transaction history, and deposit funds into your loan or cash management account. To withdraw funds, you need to contact us. Account Manager service You will be allocated an Account Manager to look after your Facility. They are your first point of contact to assist with any queries in regards to your National Margin Lending Facility. Your Account Manager is part of the National Margin Lending Team, any of whom can be contacted if your Account Manager is unavailable. 19

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21 How does a National Margin Lending Facility work? Operating your Facility This section outlines how to operate your National Margin Lending Facility on a day-to-day basis. It covers how to provide security for the loan, how to buy and sell shares, and acquire and redeem managed funds using the Facility. Shares Your broker Where you have an existing broker there is no need to change this relationship. The buying and selling of shares can be conducted through any broker that will settle with a margin lender. Providing shares as security All shares you offer as security or you purchase using your National Margin Lending Facility are registered in your name on CHESS (Clearing House Electronic Sub-register System). The sponsoring participant is National Margin Services Pty Ltd (ABN ), which means that any shares held on CHESS through National Margin Lending cannot be sold or transferred to another person without the consent of National Margin Lending. When you apply for a National Margin Lending Facility and provide your existing shares as security, you agree to allow National Margin Services Pty Ltd to become the sponsoring participant of those shares. This means that the sponsorship of the shares needs to be transferred to National Margin Lending. National Margin Lending will arrange this after you complete Attachment 3 Transfer/Refinance Instructions in the Application, and attach a copy of your CHESS/Issuer Sponsored Holding statement. Your shares are still held in your name and any information regarding them, such as general notices, dividends, rights issues etc will still be sent to you, by the share registry. National Margin Lending considers that there are greater risks for portfolios consisting of predominantly one stock. Under these circumstances, we may reduce the security ratio, or not lend at all against the stock, where the particular stock constitutes 75% or more of the security value of your portfolio. A single managed fund is not considered a single stock. 21

22 Buying and selling shares The buying and selling of shares using a National Margin Lending Facility is carried out through your broker in the normal manner. With each request (i.e. to buy or sell), your broker will normally contact us to obtain confirmation of the trade. If confirmation is not given, settlement may not proceed. Buying shares When buying shares using your National Margin Lending Facility, they can only be purchased in the borrower s name. When placing your buy order with your broker, you need to advise them that National Margin Lending will be funding the trade. Your broker will then send us a copy of the contract note to be settled. Upon settlement of your trade, the funds will be drawn from your National Margin Lending Facility and paid to your broker. Selling shares When placing your sell order with your broker, you need to advise them that National Margin Lending will deliver the shares at settlement. Your broker will then send us a copy of the contract note you wish to be settled by us. Upon settlement, the sale proceeds will be paid into your National Margin Lending Facility (i.e. loan account), thereby reducing the debt. For fixed rate loans, the funds will be deposited into your cash management account. If a third party provides securities for your National Margin Lending Facility, they are still able to sell them. When this happens, the sale proceeds are not credited to your National Margin Lending Facility to reduce the debt. Instead, they are paid into a cash management account that National Margin Lending automatically establishes in the guarantor s name. This account however, still forms part of your National Margin Lending portfolio. You are able to purchase shares that are not on our list of approved securities. These shares will form part of your margin lending portfolio and will be mortgaged to National Margin Lending. However, no security ratio will be applied to them. 22

23 Managed Funds Providing existing approved managed funds as security For any existing approved managed fund you wish to provide as security to National Margin Lending, you will need to complete Attachment 3 Transfer/ Refinance Instructions in the Application, and attach a copy of your most recent unit holding statement from your fund manager. We will then arrange for the appropriate mortgage documentation to be sent to the fund manager, or in some instances the managed funds may be transferred to NMS Nominees Pty Ltd to be held as nominee on your behalf. This does not cause a change in beneficial ownership. Acquiring and redeeming managed funds Acquiring units An initial acquisition of managed funds will require you to forward us a signed managed fund investment application contained in the relevant offer document. In most cases, you can acquire additional units by completing the necessary form contained in the Reference Guide that you receive upon approval of your Facility. Redeeming units You can redeem units by simply completing the necessary form (available within the Reference Guide) and forwarding it to National Margin Lending. We will then forward instructions to the relevant fund manager and when we receive the redemption proceeds, they will be paid to your loan account or, if you have a fixed rate loan, your cash management account. If the redemption relates to a guarantor s unit holding, the redemption proceeds will be paid into the guarantor s cash management account. Switches If you wish to switch from one investment to another (as long as it is with the same Fund Manager), in most cases you will need to complete the necessary form (available within the Reference Guide) and forward it to National Margin Lending. We will then arrange the switch directly with the fund manager on your behalf. Please note that any special conditions imposed by the fund manager may apply. Third Party Securities You can arrange for another person or company (providing they are not acting as a trustee) to provide some of the security for your National Margin Lending Facility. This is known as third party security and provides you with the opportunity to use another person s or company s existing investments as security for your Facility. The owner of the shares or managed funds needs to act as guarantor to your Facility. Please seek independent professional advice regarding any tax implications, and legal obligations and responsibilities of acting as a guarantor. 23

24 Gearing and tax planning Using a National Margin Lending Facility to gear your investments may generally have the following tax consequences: Gearing broadly involves you borrowing money to invest in an income producing investment. With a National Margin Lending Facility the investment is generally a share and/or managed funds portfolio. The interest you pay to service your Facility in any year may be tax deductible. If you claim the interest expense as a tax deduction, the deduction may be applied against assessable income earned throughout the year (for example, your salary and any income you receive from your investments). If you are an individual investor, you should only be liable for capital gains tax on half the realised nominal gain arising upon disposal of any part of your share or managed funds portfolio, if you hold the share or managed funds portfolio for 12 months or more. Dividends paid on Australian shares in your investment portfolio may yield imputation credits. Any dividends you receive may already have an amount of tax paid (fully or partly franked), which may in certain circumstances allow you to further reduce your tax liability. National Margin Lending does not provide taxation advice and the information contained in this brochure is based on our interpretation of the relevant laws as at 1 July Your tax position will depend on your personal circumstances. Therefore, you should not rely on this information in relation to your own position we recommend you seek advice from your financial or tax adviser as to the tax consequences of, and generally the suitability of a National Margin Lending Facility for you. 24

25 How to apply Please complete the National Margin Lending Facility Application provided in this brochure and forward it in the enclosed prepaid envelope to National Australia Bank Ltd, Margin Lending, Reply Paid 1650, Melbourne VIC Please note that if the security you are providing for this Facility is through a third party, the National will require a guarantee and mortgage. This can be arranged by completing Attachment 6 Guarantor/s in the Application. Companies or Trustees on behalf of Trusts Companies and trustees on behalf of trusts can establish a National Margin Lending Facility, subject to approval. In addition to the standard documentation, applications from a trustee on behalf of a trust, must be accompanied by a certified copy of the trust deed (together with any amendments). Approval All applications are subject to approval. National Margin Lending will generally approve individual or joint applicants within 48 hours from receipt of your application. Applications from companies and trustees on behalf of trusts may take a little longer. You will receive a welcome pack with a letter confirming the approval of your National Margin Lending Facility, and details on how you can draw down your Facility. How to contact National Margin Lending If you need any further information, Contact us on , 8.30am to 5.30pm (EST) Monday to Friday; or us at: margin_lending@national.com.au or Visit our web site: national.com.au or Write to us at: National Margin Lending National Australia Bank P.O. Box 1650 Melbourne VIC 3001 A word of caution Taking out a National Margin Lending Facility does involve some degree of risk. The stock market can be volatile and markets can fall as well as rise. Consequently, page 7 of this brochure outlines some of the risks associated with operating a National Margin Lending Facility. Please refer to the Facility Terms for further details. If you are investing in managed funds, you need to be aware that fund manager requirements will also apply. This brochure is not a substitute for reading the Facility Terms, and the information provided in this brochure is of a general nature only and does not take into account your personal financial circumstances and investment objectives. You should seek advice from your financial or tax adviser as to tax consequences and the suitability of a margin lending facility for your circumstances. 25

26 2002 National Australia Bank Limited ABN National Stationery number (10/02) Wealth Management Stationery number 52630