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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.

What is a margin call?

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:

  • 5% for shares with an LVR of more than 75%
  • 10% for shares with an LVR of 75% or less
  • 10% for managed funds

It’s better for investors to avoid margin calls from day one, by:

  • Borrowing less than the maximum LVR for their stocks.
  • Diversify their portfolio in order to reduce volatility.
  • Regularly pay off the interest on the loan.
  • Regularly monitor the portfolio gearing level (your LVR) and make extra payments or add extra stocks to keep away from the maximum LVR.
  • Have a strategy in place for paying a margin call if it happens.

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.

Who are you?

CANSTAR identifies two distinct profiles of margin lending borrower:

  1. Share Investors
  2. Managed Fund Investors

Price

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:

  • 01% for a margin loan of $50,000
  • 91% for a margin loan of $250,000
  • 86% for a margin loan of $500,000

Investors should also consider the initial, ongoing, and discharge fees that apply to a margin loan product.

Features

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:

  • How long you have to pay a margin call.
  • Minimum and maximum credit limits on the loan, and what types of security may be used.
  • Availability and cost of trading in different types of investments.
  • Whether the loan is available directly through the trading platform.
  • Availability of cash advances, progressive drawdowns, and flexibility.
  • Repayment options and restrictions.
  • Ability to switch the loan between managed funds.
  • Availability of advisor services for client information and advice.

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.