Protected equity lending an endangered species

Protected financing volumes are decreasing due to recent tax deductibility changes, with CommSec saying the product has lost its appeal to investors.

Brian Phelps, head of investment lending at CommSec, said the new government taxation rules preventing the tax deductibility of the hedge component make the product less attractive.

"We have only opened a dozen protected loans for May.

"Whilst we still promote the product, because we see it as a good opportunity for clients to protect their position going forward, I truly do think that it will become less popular over time as clients get less of a tax benefit from being able to claim back just one component."

John Clothier, head of investment lending at Colonial, adds the regulators have it wrong.

"They are talking about tax savings, but in essence what you are finding is that they are killing the specific product range.

"There won't be any tax savings, there will be a loss of tax revenue."

The capital guarantee component for protected equity lending increases the interest rate charged, with CommSec one-year fixed rates ranging from 16 to 31 per cent, with five years' twelve to 21 per cent. The minimum loan is $50,000.

This compares to the margin lending variable 10.35 per cent charged for loans starting at $20,000, with one through five years' terms all attracting the same rate.

This year's Budget announced the protected equity deductible portion would be changed, pegged to the Reserve Bank's standard variable home loan indicator rate, currently 9.45 per cent. Previously, the deductible portion was pegged to the RBA's unsecured personal loan indicator rate, which is above 14 per cent.

Phelps is of the opinion the nine per cent market share that protected equity holds in relation to geared lending will decrease over time.

"Probably not immediately, but it will run off over time. And I think a lot of the loans that are in that space are fixed loans, and are fixed in for twelve months out to three years, so it may take up to three years for some of that to roll off.

"It is still being utilised, but probably not as strongly as it may have been had the Government not made some of those changes."