The Other Ways That You Can Borrow To Invest

If you need the funds to invest your first thought might be a margin loan. However, did you know that the traditional margin loan isn’t the only way to borrow money to invest? We take you through the other alternatives available.

What is a margin loan?

A margin loan allows you to borrow money to invest in approved shares, ETFs and managed funds. Margin lenders allow you to use the value of the shares you are buying (or already own) as security for the margin loan. The amount you are able to borrow is dependent on the LVR which is the loan to value ratio (value of your loan/value of your investments). Often the LVR for margin loans is set at 70%. Therefore, if you were looking to buy $10,000 worth of shares your margin lender will provide you with $7,000 and you would need to supply $3,000 in cash or in other shares.

Why take out a margin loan?

There are a number of reasons margin loans can appeal to investors. It allows investors to take advantage of investment opportunities as they arise, without having to have the money at hand. Having additional funds to invest can also bolster your returns and allow you to further diversify your investment portfolio.

What are the risks with margin loans?

While margin loans may be suitable for some investors there are many risks involved. Firstly, as with any loan you are expected to pay the money back and with interest. Although, with a traditional margin loan you do not have to repay the loan itself until the stock is sold.

Another risk is if the value of your investment falls it may trigger a margin call. A margin call requires investors to prop up their investment with more funds or close out their position.

Learn more about margin loans here.

Alternatives to margin loans

Recently, there has been an emergence of new margin loan offerings that still allow investors to borrow to invest but provide more flexibility on how you pay back your loan. Here are some alternatives you may want to explore:

NAB Equity Builder

The key difference between NAB equity builder and a traditional margin loan is that this loan provides investors with a monthly payment plan, so you can repay the principal and interest while investing. Much like taking out a mortgage, investors can decide on the loan term, which is anywhere between three and 10 years. NAB’s equity builder also does not perform margin calls, therefore, investors are not required to sell their shares if they are not ready to.

Leveraged Equities – Investment funds multiplier

With Investment funds multiplier, when a margin call is triggered instead of having to sell your stock at a low price investors will have the option to commence a periodic repayment plan of 1% per month until the LVR is restored to 75%. Additionally, if the market recovers sooner and your LVR is restored, you may end up paying less than if it had been a lump sum as is required in a traditional margin call situation.

InvestSmart Fundlater

Another unconventional offering is InvestSmart’s Fundlater. This loan allows investors to borrow up to $6,000 to invest into one of four InvestSmart Portfolios, from a conservative fund to high growth fund. Fundlater also provides a repayment plan so that you can pay down your loan as you invest. Technically, Fundlater is a non-recourse loan as opposed to a margin loan, which means you’ll never lose more than what you invest and they can’t take additional cash or your house as collateral. It is also worth noting that investors are required to have a minimum $4,000 in order to take out the loan.

Margin loans and margin loan related products are not for every investor. Before taking out a margin loan ensure you have a clear understanding of how they work and what is expected of you.

Cover image source: wutzkohphoto/ Shutterstock

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