Margin loan profit: What primes the growth level you need?

7 January 2014

The recent GFC spooked many share investors, with the number of margin lending client accounts falling from a peak of 248,000 in December 2007 to current levels of approximately 170,000. The RBA also reports that the underlying value of securities has also fallen significantly over that time period, from a December 2007 peak of $93.2 billion to just $44.9 billion now.

The Australian sharemarket posted a solid performance in 2013, with double-digit returns, something which may tempt many investors back into the field.  Still, when it comes to investing your existing assets – and particularly borrowing to invest – the future is what matters.

Margin Lending: A back-of-the-envelope example *

How much would your portfolio have to increase in value for you to make a profit?

To answer this, we make some assumptions:

  • You pay a typical current interest rate on your margin loan of 7.5%
  • You pay your interest in advance, offsetting tax at a 37% rate applicable to those earning between $80-180,000.
  • You have invested $50,000 of your own money.
  • You also have a margin loan of $50,000.
  • This gives you a loan-to-value ratio (LVR) of 50%.

Based on the above assumptions, your upfront interest payment would be $3,750, saving you $1,387 in tax. Net loss so far: $2,363.

With a 50% LVR on a $50,000 margin loan, your portfolio size is $100,000. In order to break even your portfolio would need to increase by just under 2.4% in value.

This excludes transaction costs every time you trade and dividend yields. Calculating the extra trading costs and dividend tax implications will likely increase the break-even point of your portfolio slightly. Even so, the end result is likely to be a 3-4% growth in order to leave you in profit.

* The above is a hypothetical example only and does not take into consideration individual circumstances. It should not be used for personal advice. Please consult your accountant or financial planner instead.


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