According to the Reserve Bank of Australia (RBA), the number of margin lending accounts pre-GFC peaked at almost 250,000 with an average loan-to-value ratio (LVR) of around 50%.
Fast forward almost a decade to the December quarter of 2017 and the number of accounts has dropped to 126,000, and with the average LVR now at a conservative 24%, borrowers are better equipped to cope with a market downturn and avoid a margin call.
Data source: RBA, Market Index
Investing for capital growth is about buying low and selling high. Sounds easy, but sadly, many investors buy and gear up into a margin loan when the market has been running hot, only to see a serious correction and margin calls. The above graphic shows exactly that, with total margin lending peaking in the December quarter of 2007 – just before the crash. Maybe margin loans are the lead indicator of a crash.
The peak was akin to “every taxi driver giving you stock tips”. Perhaps we have all been too distracted by bitcoin, but we’re no longer seeing that level of enthusiasm for borrowing money to invest in shares. In spite of last month’s biggest scare since the GFC and a massive outbreak in volatility, the “margin lending lead indicator” is not suggesting a market totally overcooked.
So if the market gyrations of the past few weeks haven’t dampened your appetite to dive into the market with leverage, a margin loan can still be an option.
Gearing can amplify your returns, with the debt allowing you to say, double the size of your share portfolio. If your investments go up, you might double your gain. However, last month has served as a reminder that markets also fall – if they do, equally you can double your loss.
Gearing can come from a home equity loan if you have sufficient equity in your home to secure it or through a margin loan. The former does come a little cheaper and doesn’t come with the potential pressure of margin calls that must be covered within 24 hours. But if you don’t have enough equity in your home or wish to preserve it for future renovations or upgrades, a margin loan is a viable alternative. The other advantage you can get with a margin loan is that shares you already hold can be lodged as security for the margin loan, effectively gearing them up to build a larger portfolio. Margin loans also come with tools to support your investment management.
Not all margin loans offer equal value when it comes to price and features. Canstar’s 2018 Margin Loans Star Ratings Report revealed four margin loans that offer outstanding value compared to other margin loans in the market.
These margin loans stood out with a combination of low interest rates, long lists of acceptable securities against which they are willing to lend and a range of other useful product features.
So while they may have lost some of their popularity since the GFC, the right margin loan can still offer great value to some investors pursuing a geared investment strategy.
Steve Mickenbecker is the Group Executive, Financial Services at Canstar.