Investors purchase the SFI in two instalments. The first is paid upfront and is typically around 50 per cent of the cost of the underlying security. It also includes a premium for the protection referred to above. Investors also commonly pay the first year of interest upfront, although some products offer interest loans with monthly repayments.
Paying the second instalment is optional. You pay it if you want to own the underlying shares or units outright. Alternatively you can sell the SFI on ASX at any time.
For high-dividend shares such as Telstra and the top four banks, the second instalment will reduce over time, resulting in a smaller optional second payment. For shares that reinvest profits and pay smaller dividends to investors, such as BHP Billiton and Rio Tinto, the second instalment may remain the same or increase slightly as interest is capitalised to the loan.
Ongoing interest is charged once a year and is automatically added to the loan. Dividends or distributions paid by the underlying securities are used to reduce the loan. Interest deductions and franking credits can be used to reduce the tax payable by an individual or SMSF.
Any capital gain from shares that have increased in value above the loan amount can be retained, depending on personal circumstances.
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