Protected equity loans fall out of favour in Australia

Protected equity loans in Australia have fallen out of favour with investors as a result of the Australian Tax Office reducing the maximum interest deduction on May 13 this year. The benchmark interest rate in the capital-protected borrowing rules was changed from the Reserve Bank of Australia's indicator variable rate for unsecured personal loans (14.55%) to the standard housing loans rate (9.35%), which means an investor borrowing A$100,000 at 20% can claim a tax deduction of A$9,350 as opposed to the old deduction of A$14,550 and the real cost of A$20,000.

"These products are not flavour of the month at the moment," says Adam Cowperthwaite, Hong Kong-based Asia-Pacific head of structured retail products at Credit Suisse. "The put option premium is added onto the base retail lending rate, and the recent lowering of the maximum interest deduction has meant that a large portion of the resulting total annual cost is no longer tax deductible, which makes the structure significantly less tax efficient."

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