Springboard To Success

The Age

Monday October 4, 1999

JANELLE CARRIGAN

The old adage "money makes money" certainly rings true for investors keen to take advantage of good-value share buys, hot properties and bargain-priced collectibles. Having a comfortable cache of savings at your disposal is the most cost-effective and painless way to jump into new investment opportunities.

But if finding $5000 or $10,000 in spare change is about as likely as predicting the outcome of the state election, then borrowing funds is a viable alternative - provided the cash is used as a springboard to create wealth and not debt.

Cashless investors are working through such a dilemma now with the Telstra 2 share offer - whether to bypass the offer or delve into debt to take advantage of a discounted share-buying opportunity. Applications for a parcel of shares in the hot telco stock close very firmly at 4pm on Thursday, and while payment for the stock is split into two instalments, the cash on the first instalment is due with the application.

The final number of shares allocated to each investor is not yet certain, but pre-registrants and current Telstra shareholders holding at least 50 shares will be entitled to at least 400 shares (existing shareholders can receive one T2 share for every five current shares they hold). New applicants can apply for at least 150 shares, with no guarantees on the number they will finally receive.

With the first instalment priced at $4.50, a parcel of 400 shares costs $1800, a parcel of 1000 shares costs $4500; 2000 shares will cost $9000. (The second instalment, priced at a discount to the average Telstra price for the week ending 17 October, is due by November 2000).

So how does an investor without a plump savings account take advantage of the offer?

Aside from relying on the benevolence of a relative, the three fundamental quick-cash options for small borrowings are drawing funds from a credit card, taking out a personal loan or dipping into the equity in your home. Margin lending is another common avenue - where investors borrow a portion of a share portfolio's value and use the shares as collateral - but borrowing starts at a minimum $20,000.

Putting the shares on plastic via a stockbroker is possible, as is making a cash advance to pay for the shares directly, but industry experts are unanimous in advising against the credit card option.

"We would not recommend it in a pink fit," says John Wilson, a client adviser with stockbroking firm William Noall. "But people are desperate to participate in these floats, and a bank loan can be quite difficult to get."

Paying by credit card for shares in a float is particularly dangerous, says Mr Wilson, as if the shares don't perform well investors are left with a low-value asset and a high rate of interest on the debt.

The traditional unsecured personal loan is a standard option for borrowers looking for $5000 to $10,000 but unable to offer a clutch of assets as collateral. Interest rates vary considerably, with some of the more competitive on offer sitting at 10 to 11 per cent.

Peter Jones, a financial adviser with the Financial Professionals Network, cautions that for the investment to be effective, growth and income on the stock have to be greater than the interest accruing on the debt.

"I believe that will probably happen (with T2), but investors have to be aware that the interest rate applicable to whatever they borrow is going to be critical."

The most effective avenue for no-fuss, low-cost access to quick cash is using the equity in your home, says Mr Jones.

"If you're a higher-income earner, taking equity out of your home is sensational - it's tax-effective, it provides diversity into other asset classes rather than just real estate, it provides potentially high growth into direct shares and/or managed funds. It's a terrific way to create wealth in the longer term."

Typically set up as a line of credit attached to a home loan, a pre-approved limit is set and borrowers are only charged interest when drawing down on the loan. There are potential additional costs in the form of a one-off loan establishment fee and ongoing service fees. Rates vary depending on the flexibility of the product. Loans offering more transactional options tend to attract higher interest charges, according to Cassandra Williams, a financial analyst with banking research group Cannex.

Home owners can also set up a personal loan secured by their mortgage, or can access a redraw facility if a loan offers this option. To add to the confusion of choice, some institutions label these product options under the "Home Equity Loan" banner.

Whatever the eventual borrowing outcome, provided it's a carefully thought-out long-term plan, many professionals believe diving into the T2 offer is worth the risk.

"I recommend it as a strong buy," says Mr Wilson. "It is a relatively low-risk investment with fantastic growth potential. As far as risk-return investments go, T2 is about as good as it gets."

Top rates for borrowing under $10,000
 Credit Cards, with no interest-free days
 Institution                    Product                         Rate%   Annual
Fee
 HMC Staff Credit Union                 Visa                    9.15    $60
 Education Credit Union                 Multiaccess Visa for OD         10.95
Nil
 ANZ Bank                       Visa Standby            11.00   $25
 Endeavour Credit Union                 Visa to access OD               11.75
$24
 NRMA Building Society          Visa No Free Days               11.90   $25
 *Ranked by rate
 Unsecured Variable Personal Loans ($5000)
 Institution            Product                                 Min Rate%
Max Rate%       Entry Fee       Annual Fee
 National Bank          Variable Rate Personal Loan             9.99
13.00           $100            $72
 HMC Staff Credit Union         Basic Option Unsecured          10.40
10.40           $100            Nil
 ANZ Bank               Variable Rate Personal Loan             10.90
10.90           $125            $100
 Education Credit Union         Variable Rate Personal Loan             10.95
        10.95           Nil             Nil
 St George Bank                 Variable Rate Personal Loan             10.95
        10.95           $100            $60
 *Ranked by max rate, then min rate, then fees
 Unsecured Variable Personal Loans ($10,000)
 Institution            Product                                 Min Rate%
Max Rate%       Entry Fee       Annual Fee
 National Bank          Variable Rate Personal Loan             9.49
11.49           $100            $72
 HMC Staff Credit Union         Basic Option Unsecured          10.40
10.40           $100            Nil
 ANZ Bank               Variable Rate Personal Loan             10.90
10.90           $125            $100
 Education Credit Union         Variable Rate Personal Loan             10.95
        10.95           Nil             Nil
 St George Bank                 Variable Rate Personal Loan             10.95
        10.95           $100            $60
 *Ranked by max rate, then min rate, then fees
 Revolving Line of Credit, secured by home
 Institution            Product                         Rate%   Est. Fees
Ongoing Fees
 Mortgage House of Australia    Equity Alternative              5.98    $688
        Nil
 LoanNET                Line of Credit Interest Only    6.20    Nil
Nil
 Wizard Mortgage Corp   Wealth Power            6.20    $695            Nil
 Macquarie Bank                 Mortgage Minimiser              6.34    $585
        $120
 Endeavour Credit Union         Solutions                       6.45    $600
        $180
 FAI Home Loans                 FAI Link Line           6.45    $600
Nil
 *Ranked by rate
 Source: Cannex

© 1999 The Age

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