Margin lending

A Margin Loan is a flexible line of credit to invest in shares. Typically, this means borrowing against your existing assets. In the same way that property investors put down a deposit and borrow the rest, a Margin Loan allows you to buy a significant share portfolio with as little as a 25% deposit. This deposit can be in the form of cash or shares or a combination of these.

Most Margin Loans have a list of approved securities, that is, you use the funds provided to purchase shares on the lender's approved securities list. Each approved security has its own Loan to Value Ratio (LVR), representing the maximum amount that the lender is prepared to advance against that security. This is usually between 40% and 75% of the market price of the security.

What's more, a Margin Loan can be a potentially tax efficient investment strategy. This is because interest on the loan is generally tax deductible.

The simple examples below illustrates how, by increasing the amount you invest, a Margin Loan can potentially magnify the returns from your investments. As a Margin Loan can also magnify any losses, many people use the additional money they borrow to diversify into other asset classes, thus reducing their total portfolio risk.

Example: Comparison of 10% increase in market value with and without margin loan.

Borrowing to invest allows you to have more money invested in the investments of your choice. Not only does this increase your potential returns, but it also allows you to diversify across more investments by utilizing your existing shares as security, and provides potential tax advantages.

To mitigate the risk of margin calls we generally recommend that clients gear their portfolios well below the lender's LVR. Typically this will allow an investor to gear their portfolio to 50% quite comfortably.