Fine until the second to last paragraph....HNZ has been around a couple of years and lets face it looks ok but has no real track record or history like ANZ....Yes it MAY show capital appreciation and it MAY keep giving dividends but there is no guarantee on that continuing...its a minnow and a new minnow..I certainly wouldn't be borrowing against my house on THAT either. Caveat emptor. on everything anywhere...and forever.
Quote Originally Posted by Roger View Post
I can see why this would be a perplexing situation for many and for others it would seem like easy money, which on the face of it, it is.
Let's ramp it up to illustrate my points better. Suppose you're debt free and have a lovely home in Nelson worth say $700,000 and the bank offered to lend you $500,000 to invest in these Basil 3 capital compliant loss absorbing deeply subordinated unsecured financial instruments. Suppose also you're in a good paying job and / or business and all is well for the average Joe Bloggs. Joe and his Mrs think this is the easiest 2.2% return they'll ever make and will earn $11,000 before tax for nothing right ? WRONG.

1. You are trading the security of your debt free family home for "a risk" to make that $11,000 per annum before tax, $7,370 per annum after 33% tax.
2. You are moving from a completely risk free, (assuming you're living in a part of Nelson that doesn't flood) totally secure position in your home which provides long term security for you, your wife and your children to a psotion where you're exposing them to risk.

So what's the risks ?

1. Debt servicing Risk. Well ANZ in certain circumstances don't have to pay interest on these and its non cumulating and they wouldn't if there was a serious "event". You however would still be required to pay your interest at $25,000 per annum and while this probably wouldn't greatly affect you it would smash many families budget to bits.

2. Capital Risk. They're loss absorbing so in the event of a crisis at any time over the entire life of this financial instrument, (read GFC Mk2), if in the Reserve bank of Australia's opinion it was necessary for the bank to give its shareholders "a haircut" you could see a substantial portion of your investment obliterated but of course you'd still be left holding the baby on your full $500,000 mortgage. If you got a 40% haircut, ($200k of your $500K gone, it would make the circa $7.5K per annum after tax return, look a bit silly wouldn't it !!

Now I know you're a bright and likeable guy and have your head screwed on well and truly and have a range of other quality investments and wouldn't be so silly as to do this to a level of half a mil so the above is purely for illustrative purposes for others to understand the risks, fully.

There's no free lunches in the investment world even when it appears there are !!

Now on the other hand if one were to say, yes there's risk here (as in any capital investment), but lets borrow that $200K and invest in more HNZ shares which will give better dividends and in all likelyhood dividend growth each yearand capital appreciation I think there's a far better case to be made for that sort of investment being better on a risk / reward basis, e.g. your investment could easily double (as you know it does with that company), in value in 5 years and you're being pretty well compensated for the risk involved.

Disc This poster thought he was clever and decided to partake of what appeared to be a free lunch and did what you're proposing to do on a fixed interest product prior to the GFC and got his fingers burned...once bitten twice shy !! My hair is greyer than yours mate so I just thought I'd share some of that hard learned wisdom.