Margin Loans

What is a margin loan?

A margin loan is a type of loan that allows you to borrow funds to invest in shares, managed funds and other securities such as exchange traded funds (ETFs). This is also known as leveraging or gearing your investments. Your existing investments are generally used as security against the margin loan, which then allows you to make extra investments to add to your portfolio.

But there are risks involved as a margin loan also has the potential to magnify your losses if your investments lose value, because you still have to repay the full loan plus interest.

How do margin loans work?

When you apply to take out a margin loan, the amount you can borrow is determined as a percentage of your existing investment, known as the loan-to-value ratio (LVR), typically about 70%. This can vary depending on the lender and the type of investment you are considering.

For example, say you already have $50,000 in investments and you want to increase that by a further $50,000. Your lender may offer you a margin loan at 70% LVR, which is $35,000. You would need to provide the extra $15,000 to make your investment.

A lender will use your existing investment as security and if that falls in value, below the agreed LVR, your lender may issue a margin call. If you can’t provide any additional funds to improve your financial position then the lender has the right to sell your shares or investment to repay some or all of the margin loan.

What are the pros and cons of a margin loan?

There are risks involved in any type of investment in shares or other securities so you need to weigh up your options to see if margin lending suits your financial situation. You may be wise to seek some independent professional advice.

Read more: Pros and cons of margin lending

The advantage of margin lending is that it allows you to use your existing investment to access funds to make further investments you couldn’t otherwise afford.

There may be tax benefits too as you may be able to claim the interest payments on your margin loan as a tax deduction.

You need to check to see what restrictions (if any) a lender may impose on the type of investments it is willing to offer you a margin loan. That may limit your options on any new investment.

The other downside is that your new investment may not perform as you expected, or your existing investments may fall in value, leading to your lender issuing a margin call.

The Australian Government’s Moneysmart website says a lender will generally give you 24 hours to sort out any margin call, but if you can’t get things back to an agreed level then your lender can take action to recover funds.

“Margin loans are a high risk investment,” the website warns. “You can lose a lot more than you invest if things go sour.”

What to look for in a margin loan?

Each year Canstar researches rate a number of margin loan providers and their products to weigh up how they perform for two distinct profiles of investors who may be interested in taking out a margin loan:

1. Share investors
2. Managed fund investors

When it comes to choosing a margin loan, it pays to consider options and shop around. Since margin loans carry a significant financial risk, you need to look for a great value loan that suits your needs.

To a certain extent, value for money with a margin loan depends on how much and how often you invest. You should also look for a low price and features that make a loan easily manageable.

Consider the cost of a margin loan

The first thing most people consider when choosing a margin loan provider is a trading platform, but the interest rate charged on a loan can make a big difference.

Consider the features of a margin loan

Price isn’t the only factor to consider, of course. Features such as the ability to use international shares as security and being able to sell/short put options can also factor into your decision.

Canstar ‘s Star Ratings consider a number of features that may affect the value of a margin loan, such as any repayment options and restrictions, minimum and maximum credit limits on the loan and what types of security may be used, the availability of advisor services for information and advice, and the time limit for paying a margin call.

For more details about the way we rate various features on margin loan providers, read the methodology in our latest Star Ratings and Awards report.

Margin Loan Star Ratings and Awards