Protected Portfolio Loan through Commsec

[backtobasics]

I was reading about the Protected Portfolio Loan that is available through Commsec.

http://www.comsec.com.au/Public/Inve...folioLoan.aspx

Has anyone taken out one of these loans before and what has been your experience?

I look forward to hearing from you.

Cheers

[duncan macgregor]

It all looks to good to be true so it probabely is. The interest rate for starters is to low to be real. If its all that easy why dont the bank just do it themselves. Never done it so dont know, sounds like a swindle somewhere along the line. macdunk

[whiteheron]

It seems that there is a hook in this somewhere

Who would stand your losses and let you take your profits ?
No one that I know !

I highly suspect that somehow you will end up standing the losses, the bank is not there to give money away

Comsec would appear to be a (relatively) reputable outfit, however I smell a rat somewhere here
The upside is promoted, but there is no mention of the downside

I note in the small print that the true interest rate is 12.26 % payable annually in advance

Much more information is needed I think before one could make a meaningful judgment

I will be most interested in hearing from others who know somewhat more about this, especially the pitfalls side

[backtobasics]

Surely someone has investigated this in the past?

Look forward to your comments.

[Snapper]

The real interest rate is at least 12% pa depending on the period of the loan and the stock/s chosen. Without reading the investment staement I imagine the bank would purchase an option on the stock to protect its position. Note the interest payments are prepaid andwith such a hefty interest rate (up to 20% in some cases) I'm sure that they could do this and still make a profit. If you knew your way around the markets you could probably do the same yourself for cheaper. Doesn't look like a scam to me any more than any other capital prtected investment.

[Halebop]

I had a quick look and got a very different impression from MacDunk & Whiteheron it seems. The interest rate looked very high to me. Depending on the term the share was held and the individual share in question the interest rates could be extremely high - sometimes in the 20s%. Paying this upfront means there is a hidden cost on the interest compounded for a 12 months. At a 6% opportunity cost of paying that money up front, a 10% interest bill becomes 10.6% and 20% becomes 21.2%.

CBA's cost of borrowing is probably 1/3rd the average rate they charge so this probably works like a standard insurance underwriting process where they offset increased margin against potential capital guarantee losses. The list of investment candidates in the disclosure statement also looked limited but I'm not sure if this was complete.

The good news here is that default risk is always underestimated so ultimately CBA will be the patsy but it might take 15 years to get there. I'd consider it for the right green chips with growth potential but the CBA interest rates and if I'm reading correctly penalties for early repayment would still need a lot of outperformance to overcome.

[Snapper]

In the example they also do their calculations based on a 48.5% taxpayer which is a bit high for NZers. Don't forget the currency risk as well.

[backtobasics]

The more I look at this it appears to be a no-brainer. You can't lose!

[whiteheron]

I take it that this is only available for certain blue chip shares and not any old share that an investor may choose

Is this correct ?
Anybody know ?
I have not seen the fine print

[Halebop]

quote:Originally posted by cantab

CBA will buy a put option, that way the bank can't lose and neither can the investor...

A put option is only as good as the money behind the other end of the transaction. A major crash or correction could leave both the security inadequate and options worthless. In this case, CBA might call the loan which might not favour the investor either. There is no such thing as riskless.