Margin Loans

What is Margin Lending?

Margin lending is the process of borrowing money for investment purposes. Margin Lending allows the investor to borrow against securities held in their share portfolio.

How does margin lending work?

Margin Lending works in a similar fashion to residential lending. Generally a deposit of approximately 20% may be required, with the funder lending the balance to the investor to purchase listed securities and/or into managed fund portfolio’s. The percentage of the deposit is usually determined by the type of securities the investor intends to purchase. Margin Lending is only available for investment in ‘blue chip’ securities.

What are the benefits?
Margin Lending allows investors to:

• Build their targeted investment portfolio more rapidly;
• Enjoy the leveraging benefit, and multiply the investment return on equity by significantly increasing their portfolio value and exposure in the share market with a comparatively small initial equity contribution;
• Have a simple and flexible 'gearing' option;
• Create a tax benefit - Interest on a margin loan is normally tax deductible, therefore reducing the tax paid on investments and other income. Further, Investors can prepay the interest on the Margin Loan for up to 12 months in advance;
• Achieve greater portfoio diversification.

Who does it suit?

Margin lending is recommended for those who understand and have a reasonably good knowledge of the stock market. Individuals who hold a ‘risk averse’ type position in relation to investments are not advised to take out margin loans, as although returns can be amplified greatly in some cases, the same applies to the losses in the case of a market downturn. Individuals whom fit with the points below are potentially suitable for a margin investment strategy:

• Have a relatively high and secure disposable income
• Are willing to bear greater risk for the chance of greater return
• Have adequate cash reserves or other security to meet margin calls

What are the risks?

Although margin lending can accelerate investment returns, it can also expose you to greater losses if particular share prices decline in value due to the 'gearing' effect. Investors are likely to get a ‘margin call’ and could be forced to sell part of their portfolio, or contribute by other means to meet the margin loan commitments.

Before applying for margin loans, investors are always recommended to seek independent financial advice to ensure they fully understand the tax implications, and any legal and financial ramifications of taking out a margin loan to their particular situation. Lenders are not authorised to give tax or investment advice.

What is a Margin Call?

When the value of an investors portfolio drops below the set margin limit, the lender will make a ‘margin call’ asking for extra equity contribution. The investor would then need to make up for the difference by :

• Injecting more cash to lower the borrowed amount ;
• Buying more securities to raise the portfolio’s value;
• Selling some of the existing portfolio to release cash to lower the loan amount.

Standard Capital consultants are available at any time for a consultation, so please feel free to call us on (03) 9670 1770 .