A margin loan is a type of investment loan that permits you to borrow funds for the purpose of investing in shares, managed funds and other approved financial products. The amount that you can borrow is determined by the securities in your portfolio, their Loan to Value Ratio, and a credit limit based on an assessment of your financial position.
General Disclaimer: Nothing in this FAQ constitutes advice. You should consult with a financial planner or other suitably qualified and licenced professional in order to determine if a Margin Loan is suitable for your circumstances. We source competitive funding once you have decided that the Margin Loan is suitable for your circumstances.
Introduction
Using a margin loan may to a suitable means of allowing you to amplify your investing power to build wealth and diversify your portfolio, and it may offer tax benefits (your financial planner will advise of these potential benefits). However, just as Margin Loans have the potential to grow your wealth, if stocks go down in value your losses will be amplified as well. It’s important to conduct a sound risk-benefit analysis when consider the type of borrowing since you’re not borrowing with a known asset as security – it’s entirely possible shares might eventually be worth nothing.
How Does a Margin Loan Work?
A margin loan uses existing shares, managed funds and cash as security. These existing assets are used to calculate your Loan to Value Ratio (LVR), which determines how much you can borrow. Once your borrowing limit is established, you can use available funds to purchase further approved investments (shares, managed funds etc). Your new and existing investments are combined to form your total portfolio.
Interest on a margin loan is calculated daily; but how it is paid will depend on the loan. Some margin loans allow interest to be paid in advance.
Benefits of a Margin Loan
- Boost your investing power. Increasing the size of your investments could amplify your profits in a rising market as well as increase the size of any dividend payments.
- Diversify your portfolio. Access to more funds means you could diversify across different asset classes, industries and companies. This in turn could also help reduce investment risk.
- Unlock equity. Don’t sell your shares to realise the equity in your portfolio – harness its borrowing power with a Margin Loan. Defer capital gain (and loss) events, and build a larger portfolio at the same time.
- Potential tax advantages. Depending on your circumstances, and determined based of the advice of a suitable licenced professional, you may be able to claim tax deductions for some or all of your borrowing costs.
Margin Loan Risks
- Amplified losses. Just as borrowing to invest can increase profits, it can also amplify your losses should the market turn against you.
- Interest rate changes. Unless you’ve opted for a fixed rate margin loan, interest rates could change at any time increasing the overall cost of your investments as well as potentially reducing profits.
- Margin calls. If the overall value of your portfolio falls to an extent that it exceeds your LVR, you’ll need to resolve/satisfy a margin call.
A margin call usually occurs when the market value of your security portfolio falls significantly, which in turn will reduce your borrowing limit. This will also cause a rise in your gearing level, as your loan balance has not changed. If your current gearing level exceeds your maximum loan to value ratio, a margin call may occur.
If the market moves against you and the LVR goes over the borrowing amount, your bank will institute a margin call, meaning that you you will need to top up the balance of your loan to get it beneath the agreed borrowing limit. For this reason, you need to pay close attention to the value of your investments if you have a margin loan so you can take action if you are in a margin call situation. It’s important to know that the security you use against the loan can be used by the lender to repay the loan. There are three different ways you may do this:
- Top up the loan balance with cash.
- Sell some of your portfolio and use the proceeds to repay a portion of the loan.
- Transfer existing securities not currently being used as security on the loan to increase the borrowing limit.
To provide you with breathing space, some margin lenders will provide a buffer which is added to the market value of the approved securities in your portfolio. The buffer is usually no higher than around 10%, and ensures that small market fluctuations do not trigger a margin call.
Commonwealth Bank Video
The following video sourced from the Commonwealth Bank provides a short overview on the Margin Loan.
Acceptable Securities List (ASL)
Each lender will provide their own approved ‘Acceptable Securities List’, which are the securities they’ll consider when evaluating your borrowing position and the applicable LVR. These lists are usually updated monthly. There are a number of factors that impact your LVR, and this varies from lender to lender.
Rates, Fees, and Charges
A number of fees and charges will apply to your product, so you should carefully review the relevant Product Disclosure Statement in order to fully understand the product, and in order to compare one product against others. The product may represent a higher risk to the lender and usually carries a slightly higher rate.
Note that not all lenders will provide Margin Loans and they’re considered a speciality product. Various (but limited) margin loans are listed on our margin loan page although you should contact for information on those products that are not listed.
