Margin Loans - February 24th
Post-GFC, margin loans have been out of favour with many investors. From a peak of 248,000 margin lending client accounts in December 2007, the most recent Reserve Bank of Australia (RBA) statistics indicate that client …– Read more
Margin Loans - February 23rd
In terms of volatility 2016 has certainly started with a bang rather than a whimper, thanks in some part to the Chinese stock market performance and global sentiment. Nevertheless it should be remembered that investment …– Read more
Industry - February 23rd
Despite the current volatility on Australia's sharemarket, margin lending continues to be a valuable way for many investors to increase their long-term wealth. According to current Reserve Bank (RBA) statistics, there are approximately 144,000 margin …– Read more
A margin loan lets you borrow money to invest in shares, managed funds, and other investments such as master trusts and wraps. This means you can invest more money than otherwise, so your invested funds are leveraged or geared to work harder. On the other hand, a margin loan also has the potential to magnify your losses if your stocks or funds lose value, because you still have to repay the full loan plus interest.
According to current Reserve Bank (RBA) statistics, there are approximately 142,000 margin lending accounts in Australia, with a collective $12,109 million of loans being utilised. Over the past decade, Australian investors have become more conservative borrowers, with current investors utilising just under 23% of their available credit limit overall, compared to 47% of their available credit limit back in 2005.
The ASX-Russell 2015 Long-Term Investing Report showed that borrowing money to invest may be worth it, as they found geared investment portfolios had higher long-term returns than non-geared portfolios. Keeping in mind, of course, that this is now past performance and there is no guarantee that future returns will provide a similar result.
CANSTAR can’t tell you whether or not you should take out a margin loan, but we can tell you which margin loans offer outstanding value for money so that your loan works for you.
A margin call happens when the stocks or funds you’ve invested in falls far enough that the amount outstanding on your loan exceeds your borrowing limit by more than the buffer. This happens because your stock portfolio is the security for a margin loan.
When a margin call is made, your lender usually gives you 24-48 hours to repay your loan back up to the buffer, either by making a payment or by transferring more approved stocks into your loan portfolio. If you can’t pay the margin call, the lender will sell part or all of the shares that are security for your loan to bring your loan back under the LVR (loan-to-valuation) buffer.
Lenders usually have a built-in buffer to allow drops in value of up to:
It’s better for investors to avoid margin calls from day one, by:
Apart from unexpected market volatility, the chance of a margin call is slim if your portfolio is not heavily geared with a high LVR. The RBA advises that the average number of margin calls was 0.97 calls per day per every 1,000 clients in December 2015.
CANSTAR researches and rates providers of margin lending to compare how they perform for investors with different needs. To a certain extent, value for money in terms of margin lending depends on how much and how often you invest.
CANSTAR identifies two distinct profiles of margin lending borrower:
The first thing most people consider when choosing a margin loan is simply their trading platform, but the interest rate charged on a loan makes a big difference. With the official cash rate dropping, interest rates on margin lending have also lowered significantly over the past few years.
CANSTAR’s 2016 star ratings showed that investors can currently expect to factor in variable loan interest rates (on average) along these lines:
Investors should also consider the initial, ongoing, and discharge fees that apply to a margin loan product.
Price isn’t the only factor to consider, of course. Visitors to CANSTAR’s margin loan comparison tables frequently search for features such as the ability to use international shares as security and being able to sell short put options.
CANSTAR also considers the following features that affect the value of a loan:
Will has been regularly trading with a small number of select managed funds for several years now and has built up a well-diversified portfolio. However, he has an investment goal and knows that the best way to reach it will be to leverage his existing investments in a margin loan so that he can trade with a larger amount of funds.
In 2016, our star ratings of margin loans showed that CommSec, Suncorp Bank, and Westpac are all good choices for Managed Fund Investors.