Your guide to margin loans
When you think about borrowing money in order to invest it, the first thing you’ll probably imagine is an investment home loan. You borrow a huge sum of money and hope that your property at least retains its value; ideally, you hope it’ll rise in value and you can sell it at a profit.
Some investors take out loans to invest in assets and securities other than property. While you may have heard that borrowing money to invest in shares and funds is a bad idea, it can work well if you use a margin loan.
What exactly is a margin loan?
A margin loan is a loan that lets you use the borrowed funds to invest in managed funds, shares and other types of securities. It’s not suitable for all investors, however; you need to be reasonably experienced and proactive in your investing habits.
A margin loan is certainly not a “set and forget” investment like a term deposit, because you can win bigger and, unfortunately, lose bigger.
How do margin loans work?
Margin loans work broadly in the same way as home loans. You pay interest on the loan with a view to clearing the balance in full eventually. With a margin loan, however, your portfolio of shares and funds is the collateral, rather than the house or apartment. If you lose your shirt or you can’t make your monthly payments, your lender can repossess your shares and sell them to recoup the outstanding amounts of money.
Margin loans have a few terms you’ll need to become familiar with
The loan to value ratio (LVR)
The LVR is used in the same way in a margin loan as it is in a mortgage – the lender uses it to assess how risky your loan is. Your LVR is based upon the value of your security and shows how much you can borrow as a proportion or percentage of your total investment. If your stocks have an LVR of 75 per cent, your lender will offer you 75 percent if your desired amount as long as you can come up with the remaining 25 per cent.
A margin call
A margin call is issued to an investor when the equity in a margin account decreases below a pre–set level. Each individual margin loan provider sets their own levels and requirements. It can be pretty daunting to get a margin call because not only have your investments fallen in value, but if you can’t make up the deficit with your own funds, then your broker or provider can sell your assets.
Are margin loans a good investment?
No, they are not a good investment for everyone, that’s for sure and you definitely need to obtain advice before entering into a margin loan contract.
You need to be confident, involved and be able to move additional funds into your account if your equity dips. You need to see it as an active investment, rather than a passive one. You also need to fully understand what you’re getting into before you, well, get into it.
One definite advantage of margin loans is that when they work well for you, they work very well indeed and you can really get some good returns. Some brokers will let you borrow smaller amounts to start with, to practice on, so even if it goes wrong for you, you learn a lesson without losing all your money.
A big downside to margin loans is that they can be volatile and therefore a bigger risk than government–backed bonds, for example. In addition to this, lenders can change your LVR at any moment, which can cake your gains stronger in some cases, but will also make your losses bigger.
Choosing a good margin loan
Every lender will have its own terms and practices, so it’s vital that you use a comparison site when you’re shopping for a margin loan that suits you.
Some lenders don’t make margin calls when your equity dips, NAB’s Equity Builder is a good example of this. Other lenders offer lower interest rates and others have no minimum loan amount, like Commsec’s Margin Loan.
Each lender also has a different panel of products that you can add to your portfolio, so if you have a feel for a particular asset or stock, then you might feel more comfortable with that particular lender.
The important things to look for in a margin loan include:
- The ease with which you can repay the loan – use a calculator
- The interest rate, and
- The asset classes that the lender has to sell.
It’s also important to have a contingency in case of a margin call on the account as you don’t want to get caught short.
Low interest rate margin loans
Now you know more about margin loans, you’re probably wondering what the best products for relative newbie investors are. Here are four of the most accessible margin loans with the lowest interest rates.
CommSec’s Margin Loan
This loan has a minimum amount of $20,000 and has a fixed interest rate of 6.24 per cent and a variable rate of 6.28 per cent. It lets you purchase assets in instalments and your margin grace period is 2.00pm the next business day.
ANZ’s Share Investment Loan
This product is for amounts between $20,000 and $249,999. It has a variable rate of 6.53 per cent and an attractive fixed rate of 5.95 per cent. You can purchase in instalments and there’s 1,122 approved funds. The margin grace period is until close of trade the following trading day.
Leveraged Equities Margin Loan
If you have a minimum of $20,000 to invest, then you could take advantage of the 5.50 per cent fixed interest rate for this loan. The variable rate is 6.85 per cent and there’s 2,364 approved funds to choose from. You get a 24–hour grace period for a margin call and there’s no transaction fees.
The NAB Margin Lending
This loan is for amounts between $20,000 and $249,999 and offers a variable rate of 6.80 per cent and a fixed rate of 6.85 per cent. There’s 1,221 approved funds and no transaction fees and your margin grace period is 2.00pm the following business day.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.