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Also known as gearing or borrowing to invest, a margin lending facility is a line of credit that is secured against cash, shares and managed funds. Margin lending will provide you with greater access to markets than you could by using just your own funds. In addition, you can unlock equity in existing investments for use as loan security, raise cash for other investments without having to sell assets and it can also help you diversify a portfolio.
Gearing investments gives you the potential to create wealth more quickly by having more money work for you. Similar to income from an investment property, your investment income can help you repay the loan and potentially generate capital growth as well. As an added benefit, the interest on the loan may be tax deductible. Margin lending is best suited to people with enough disposable income to cover interest payments and who are prepared to hold their investment for a long period.
Why invest using a margin loan?
A margin loan can help you to:
- Generate an investment portfolio that is much greater than you would have without borrowing; and
- Expand and diversify your existing investment portfolio without needing any additional cash of your own.
By having more to invest you can gain access to a broader spread of investments, such as shares, property trusts and managed funds. By diversifying your portfolio across various sectors you can also minimise volatility, which reduces the overall risk of capital loss against your portfolio. A margin lender will regularly publish a list of acceptable securities they will lend against - this includes a broad range of managed funds, shares, master trusts, wrap accounts, separately managed accounts and exchange traded funds.
There is also possible tax benefits associated with gearing an investment portfolio. When you borrow for investment into income-producing assets, you should be able to claim a tax deduction for the interest you pay on your loan. If your interest costs exceed your investment income, the excess can be deducted from your other assessable income, reducing the tax you pay on your salary or other income.
Important information regarding margin lending
A margin loan may not suit every investor and potential investors should understand the risks involved when considering gearing. It is important to be aware that while margin lending has the potential to magnify capital gains, it also has the potential to magnify capital losses. In the event your gearing level exceeds the maximum the lending institution is prepared to lend, you may face a margin call. You will be required to either pay off part of your loan, lodge more security or sell some of your investments. Click here to find out more on margin calls.
If you are uncertain about margin loans, geared managed funds are an alternative to margin loans. The gearing occurs at the fund level so the fund manager borrows in the name of the fund so investors are not at risk of margin calls and interest is generally paid out of the fund's earnings. However just as a margin loan can magnify losses, a geared managed fund also increase the risk of loss.
 | The pros and cons of margin lending - Michael Lannon | | The nuts and bolts of gearing - IFSA | | Leverage and Investing - Michael Lannon |
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| Financial Advice | Professional fee for service financial advice - avoid % based fees that last the life of the investment.
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