Protected Loan

What is a Protected Loan?

Commonwealth Bank offers a fixed-term Protected Loan that allows you to borrow money to build a share portfolio for yourself or your self-managed super fund (SMSF).  Now available under The Options and Lending Facility, the Protected Loan could help you to:

The Protected Loan also gives you the flexibility you need to create a geared portfolio tailored to your investment strategy.  For example, you can choose the gearing and protection level; investment term; frequency of interest payments; and, of course, the shares in your portfolio, to ensure that it meets your individual investment objectives.

During the term of the loan you will receive any ordinary dividends and franking credits generated by your shares. By borrowing to invest, you can build a larger portfolio, potentially generating a larger income stream.

At maturity of the loan you will receive the benefit of any capital growth in your portfolio over the investment term. But if the value of your shares has fallen below the protected price, you simply hand the shares back to Commonwealth Bank at the original protected price.

Who can invest in a Protected Loan?

The Protected Loan is available to individuals, companies, trusts and SMSFs.  In fact, this is one of the few ways an SMSF can borrow to invest.

What are the key features?

What is the gearing / protection level?

Gearing refers to the percentage of your portfolio of shares that is funded by borrowings.

The protection level is the percentage of your portfolio of shares that is guaranteed not to fall in value over the life of the loan. As the Bank guarantees the amount you borrow, the protection level and gearing for your Protected Loan is the same.

You can choose how much you wish to borrow, up to a maximum of 100% of the purchase price of the shares. If you choose to borrow less than 100%, the remainder of the purchase price will be made up of additional funds you contribute. These additional funds will not be protected.

What is the interest rate?

You will be charged interest on your Protected Loan as well as a Protection Premium. The interest rate is different for every Protected Loan and is affected by a number of factors:

• whether you pay a fixed or variable rate, and whether this is paid annually in advance or monthly in arrears
• whether you pay the Protection Premium upfront or over the life of the loan
• the term of your loan
• the shares and the volatility of the shares comprising your portfolio

How can I pay the interest?

You can choose to pay the interest on your Protected Loan at either a fixed rate or a variable rate. If you elect to pay a fixed rate of interest, you can pay annually in advance or monthly in arrears. Alternatively, if you elect a variable interest rate, you can only pay monthly in arrears.

Are there interest deductions?

The Australian Tax Office allows a certain amount of interest to be deductible in relation to your Protected Loan. The ATO deductible rate is determined by:

• Reserve Bank bulletin indicator variable lending rate for standard housing loans plus 100 bps (currently 8.40% p.a.); and
• the interest rate you are paying on the loan.

A common strategy implemented by individuals taking out a Protected Loan is to pre-pay 12 months interest before 30 June. This means that this interest amount can be claimed in the year the interest was paid (up to a certain level). SMSFs are unable to pre-pay interest, so to get the most deductions in any one year, the most timely month to invest is July, with interest deductible the following June.

What is the protection premium?

The protection premium is a portion of your interest rate that contributes to protecting the value of your shares from falling below their loan amount. Alternatively, you can pay for this protection upfront at the beginning of your loan, in which case interest payments will reflect only borrowing costs.

You can also reduce your protection premium by capping the potential gains that you will make on a share. For example, placing a cap of 75% on upside growth. Every share in your portfolio is treated as a separate loan, so you are not obliged to cap any gains on your entire portfolio.

Can I manage my portfolio during the term?

There are many features which allow you to manage your portfolio. Under the Portfolio Management feature, you can, for example:

• Trade your shares
• Increase your protected price and take delivery of some shares from a share parcel
• Increase your protected price and loan balance to draw down equity from a share*
• Decrease your protected price to increase the number of shares you hold in the parcel*
• Write call options over a share parcel*

What happens at maturity?

At maturity of your Protected Loan, you can choose to do a number of things:

1. Sell your shares as repayment of the Protected Loan and receive any capital gains in cash
2. Transfer your shares to us as repayment of your Protected Loan
3. Sell a portion of your shares and take delivery of the remaining shares
4. Repay the Protected Loan using your own funds and take delivery of the shares
5. Extend the Protected Loan at a new interest rate and either leave the loan balance and protected price unchanged, or you can change both of these.
6. Refinance with a new Protected Loan or margin loan

Can I terminate early?

You can request to terminate your Protected Loan prior to maturity. You can break the entire Protected Loan or a share parcel. Certain Corporate Actions may also result in the termination of a Protected Loan. Break costs may be payable if your Protected Loan is terminated prior to maturity.

What is an Interest in Advance Loan (IAL)?

An IAL is available if you wish to borrow one year’s interest in advance on your Protected Loan. Under the IAL, monthly repayments of principal and interest are required. The IAL is not available to SMSFs.

What are the benefits?

• You have the flexibility to choose your shares, term, level of gearing, interest payment method and whether you pay for the Protection Premium upfront or during the term
• You can unlock cash from an existing holding to enable you to diversify
• You have a level of protection at maturity
• There are never any margin calls
• You have the potential to receive capital growth
• You have the potential to receive tax deductions in respect of your interest payments
• SMSFs are eligible to apply

What are the risks?

• The overall return on your Protected Loan may be negative despite the limited recourse feature. This is because interest costs (including the protection premium) and additional costs such as break costs may exceed any capital gains, (dividends, tax deductions or other benefits).
• Terminating early can result in break costs which can be substantial. You should not enter into a Protected Loan if you intend to terminate prior to the Maturity Date.
• Protected Loans are a geared investment. Whilst gearing can magnify gains, it also magnifies losses if not held to maturity.
• Dividends can change and this may affect the after-tax cost of the Protected Loan.
• Any change to tax laws, or the ATO’s interpretation of tax laws may affect your tax position and could affect the value of your Protected Loan.
• If you borrow less than 100% against the value of your shares, a fall in share price may mean that you will lose the amount you personally invested as only the borrowed amount is protected.

What are the costs?

When you take out a Protected Loan, you are charged an establishment fee as well as interest on your Protected Loan and a protection premium. The interest rate is different for every Protected Loan and is affected by a number of factors, including:

• whether you pay a fixed or variable rate
• whether you pay annually in advance or monthly in arrears
• the term of your loan
• whether you pay the Protection Premium upfront or over the life of the loan
• the volatility of the shares which make up your portfolio

Find out more

For more information download the:

• Flyer
• PDS

Or call 1300 786 039 to speak to a Protected Loan specialist.

^{* not available to SMSFs}

<sup>Important information

Produced by Commonwealth Bank of Australia ABN 48 123 123 124 (Commonwealth Bank).The Options and Lending Facility is a product of Commonwealth Bank which is administered by its wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited ABN 60 067 254 399 (CommSec), a Participant of the ASX Group. A Product Disclosure Statement (PDS) is available from this website and should be considered before making any investment decision about this product. The Options and Lending Facility provides sophisticated financial products which may involve dealing in derivatives. Unless you are familiar with derivative dealings and such products, these products may not be suitable for you. Bank and Government charges apply. Applications for Protected Loans and Interest in Advance Loans are subject to Commonwealth Bank’s normal credit approval.</sup>

^{This document has been prepared without taking account of the objectives, financial situation or needs of any particular individual. Because of that, before acting on the information in this document, a potential investor should consider its appropriateness to their own circumstances, having regard to their own objectives, financial situation and needs. Potential investors should consult their professional tax adviser about the tax implications of any products to their own particular circumstances.}