Margin Lending

Margin Lending

 

Looking for a margin loan? Here’s what you should know.

A margin loan allows you to borrow money to invest in shares or managed funds. Like a home loan is secured against your house, a margin loan is secured against your investments.

 

How does it work?

  • The margin lender allocates a loan-to-value ratio (LVR) against approved shares and managed funds. This is the maximum loan amount you can borrow as a percentage of the market value of your investment
  • For example, Woolworths shares may have an LVR of 75%. This means if you want to buy $100 of Woolworths, the lender will lend you up to $75 to buy them

 

What’s a margin call?

  • If the value of your Woolworths portfolio falls from $100 to $80, and your loan is still $75, your loan-to-value ratio is now 94% and you’ll be asked to restore the LVR to 75%. This is called a margin call
  • The lender normally requires you to meet a margin call at short notice (1 – 2 days) by either repaying some of your loan, or adding more approved investments into your portfolio

 

What are the benefits of a margin loan?

  • Increases the value of your investments by investing more than you could with just your own money
  • Tax deduction - interest paid is generally tax deductable
  • Diversification - more money to invest gives you the ability to diversify your investments and spread the risk across asset classes
  • Acceleration of your investment returns

 

Hot tips:

When choosing a margin loan, here’s some things you should consider:

  • Online access – make sure you can view your account online, 24/7
  • Real-time investment pricing online – some lenders only offer updated pricing of your investments at the end of each day, but real-time pricing is important if you need to closely monitor the value of your portfolio throughout the day
  • Discounts - ask your adviser or the lender for a discount on your interest rate. The bigger the loan, the bigger the discount
  • Check LVRs allocated to your investments. They’re not all the same across lenders. The higher they are the more you can borrow against the investment
  • Linked cash accounts with an LVR of 100% allow you to earn interest while you park your cash
  • Call options – some lenders let you write call options over your shares giving you the opportunity to earn additional income
  • Capital protection – some lenders offer capital protection - that is, you can protect the value of certain shares, minimising or eliminating the risk of a margin call. You should be aware of the additional cost of this

 

Watch out for:

  • Margin calls and losing your investments – If you’re in margin call and you don’t have any cash or additional investments to meet the margin call, you may have to sell your investments secured against your loan. The bad news is that because you’re selling approved investments, your loan limit also reduces, meaning you may have to sell a lot more than if you could have used other cash to repay the loan
  • Forced selling – if you can’t or don’t meet a margin call you risk your investments being force sold by the lender to repay your loan
  • Loan Valuation Ratios - LVRs can be changed by lenders at very short or no notice. A reduced LVR can also put your account into margin call
  • Keep your details up to date with the lender - if you can’t be contacted for a margin call, your investments might be sold by the lender without you knowing
  • Commission – if you have an adviser, ask how much they are paid by the lender for recommending a product to you
  • Break costs - if you break a fixed loan early, you will be charged the break costs and the interest you’ve pre-paid generally isn’t refunded

 

Anything else to know?

Margin lending industry regulations

From 1 January 2011, new regulations for the margin lending industry will come into force. This will mean applying and being approved for a margin loan will be more difficult. You will be credit assessed and assigned a credit limit, and will not be able to extend your loan beyond that limit even if your investments have grown in value (unless you apply for a higher limit).

The regulations imposed by the Government are in response to the many investors who were highly geared and lost their investments, including their homes, during the market crash in 2009.

There will also be greater obligations on the margin lender to ensure you are contacted for a margin call, and that the risks of margin lending are fully disclosed. Advisers of margin loans will also be required to assess the suitability of the product for their client.

 

Money Owl’s top picks

 

St.George Margin Lending
  • A dedicated and experienced account management team to assist over the phone with any queries or concerns about the loan
  • Competitive interest rates
  • Email or SMS alerts to you and your adviser to let you know if you’re in margin call or approaching margin call
  • View your margin loan online
  • Good choice of LVRs
  • A friendly bank you can rely on
Click here to go to St.George Margin Lending for more information or to apply online

 

Other providers

Some other margin lenders you may want to consider are listed below.

  • BT  - www.bt.com.au
  • ANZ – www.anz.com.au
  • NAB – www.nab.com.au
  • Commsec – www.commsec.com.au
  • Leveraged Equities – www.leveragedequities.com.au
  • Suncorp Bank – www.suncorp.com.au
  • Colonial – www.colonial.com.au