Protected loans endangered

Lenders offering protected loans, a type of margin loan, will in practice have to apply a lower interest rate than in the past, or at least the borrower will work out their tax affairs on the basis that this is so.

The new benchmark interest rate, for tax purposes, will be the Reserve Bank of Australia's indicator variable rate for standard housing loans.

In the budget papers, the government said the interest expense on a capital protected borrowing in excess of this level will be treated as the cost of capital protection and not deductible if on capital account.

However, the current law will continue to apply to existing arrangements for five years or the life of the product, whichever is the shorter.

The change in policy applies from last night.