What is loan principal protection?


Understanding loan principal protection for specialist investments

Borrowing to invest in shares or managed funds can be risky. If the shares or managed funds fall in value, you may have to repay the loan from your own funds.

One way of managing this risk is to use a loan that offers the benefit of loan principal protection. With these types of loans, you will have the benefit of knowing that even if the underlying investments fall in value, while you have to pay interest on the loan, you won't have to repay a set percentage of the loan (often 100%) from your own funds. This may be particularly beneficial where markets have become volatile or have fallen in value during the course of your loan.

Loans with loan principal protection also often offer other advantages over other types of investment loans, such as cashflow management. For example, while borrowers under a margin loan may be subject to the risk of needing to satisfy margin calls where the underlying investment has fallen in value throughout the term of the loan, a borrower under a loan offering loan principal protection will generally not be exposed to such requirements and can use their capital to make other investments and diversify their portfolio.

Under loan principal protected investments, if your investment falls in value, you won't have to repay a set percentage of the loan (often 100%) from your own funds.

Many loans with loan principal protection are limited recourse loans, meaning that any principal amount payable by you in respect of the loan is limited to the underlying assets of the investment and their proceeds. This is unlike full recourse loans under which your liability to the lender could be unlimited.

The Australian Taxation Office (ATO) allows self managed super funds (SMSFs) to invest in certain loan principal protected specialist investments that feature limited recourse loans.*

Talk to your financial adviser for more details

It is important to be aware that loan principal protection is not a standard feature, and can vary from product to product. For example, some products may offer loan principal protection in respect of 100% of the loan, while others may only protect a smaller portion of the loan. Additionally some products may offer loan principal protection at all times during the term of the loan, while others may only offer loan principal protection at maturity. Generally, the interest payable on loan principal protection investments is higher than traditional loans because of the benefits the investor receives. Before making any investment decision about whether to use a specialist investment offering loan principal protection, you should ensure you familiarise yourself with the risks of such investment and speak to a financial adviser.

Macquarie offers a range of loan principal protected investment solutions, including Macquarie Flexi 100 Trust and Macquarie Geared Equities Investment (GEI) plus. Be sure to talk to your financial adviser to learn more about these specialist investments and whether they may be right for you.

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