Craig Saunders of NAB Equity Lending explains the features and potential benefits of NAB Equity Builder over margin loans.
What is the difference between the NAB equity builder and a more traditional margin loan?
The most noticeable difference is that there are no margin calls. This difference is arrived at by a couple of other key differences. First, that equity builder is a principal and interest-reducing investment loan and that the underlying securities must all be managed investments, so managed funds, exchange-traded funds (ETFs) and separately managed accounts (SMAs).
How does the NAB equity builder provide clients with greater control?
I think the main point there is cash flow management that sit inside a financial plan. So budgeting, cash flow management and those disciplines aren’t upset by short-term market volatility as they may be with a margin loan where there’s a margin call. As you set your plans, set your cash flows, borrow the money to invest, that can then step out over a five, ten, fifteen year period without the volatility in the asset impacting on the credit product.
What are the repayment options?
There are two. First, all equity builder loans have a principal and interest requirement. There’s a home loan option which people would be familiar with, so you pay a similar amount each month and you have a steep repayment curve. There’s also a straight line method where you pay all of the interest each month plus a nominated fixed principal amount and so that loan will come down in a straight line.
Which products can be invested in by the NAB equity builder?
All of the underlying securities for these loans need to be ‘managed’, so managed funds, exchange-traded funds, separately managed accounts. The principle there is we’re looking for diversification in the underlying portfolio which enables us in part to take away the requirement for a margin call.
What was the thought process behind choosing them?
As described, looking for diversification in the underlying, that coupled with the principal and interest curve or the principal and interest requirement means that as a lender we’re able to say that these loans aren’t subject to margin call.
How does the NAB equity builder give financial advisers and their clients greater planning certainty?
I guess similar to the previous answer, so in terms of budgeting, cash flow, not being upset by short term volatility and asset prices – it really aligns the credit product I guess with the asset. So typically a financial planner will advise a client to invest for five to seven years, longer where necessary. A margin loan can be a fairly short-term credit product in that a margin call is a 24 hour requirement. So all of that cash flow analysis, the budgeting is more robust we feel inside equity builder because it takes away that short-term credit requirement.
Do you think this product will encourage Australians to invest more in the share market rather than the family home?
I don’t think it will take away from the family home. I think it might cause a few property investors to look at financial assets as an asset class that they might borrow to invest in. Australians are not shy about borrowing money to buy investment property and that’s almost their default position – pay off the family home, borrow some money, buy another investment property. The credit products that have been available for financial assets, so managed funds, ETFs, thus far have all had a margin call attached to them. So lots of investors might like to buy good quality financial assets but they don’t like the credit product that attaches to it. What we have now with equity builder is a very similar to a property mortgage credit product, so you can align the term of the loan to the term of the investment and that short term volatility that can impact you in a margin loan won’t impact you in equity builder.
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