What is a margin lending facility?
What is a margin lending facility?
What is a margin lending facility?
A margin loan allows you to borrow money, in addition to your own, increasing your investment capacity to invest in financial products.
Acceptable Investments include shares, Exchange Traded Funds (ETFs) and managed funds. The securities are mortgaged to the lender as security for the loan and the amount you owe. A margin loan will allow you to borrow either against existing investments or new investments purchased up to a level permitted on each holding, known as a Lending Value Ratio (LVR).
Borrowing to acquire an asset is called gearing or leverage. Investors use gearing when they expect the return on their investments to be larger than the cost of borrowing. Yet it’s worth remembering that if the return on your investment is less than your borrowing costs, you will incur a lower return or larger loss than if you had not borrowed or invested at all.
Benefits of using a margin loan
You can use a gearing strategy for a variety of reasons:
- Increase your investment capacity
Leverage an existing portfolio or create a new investment portfolio to boost your investment capacity and increase your exposure to the market.
- Diversify your investment portfolio
If you have an existing investment portfolio, this can be mortgaged to the lender, and you may be able to borrow against this portfolio for further investment. This may allow you to diversify your investment portfolio without needing to sell any existing holdings.
- Potential tax benefits
Depending on your situation, interest incurred from borrowings used for an investment may be tax deductible. You may also be able to fix and pre-pay your interest for the next financial year, allowing you to bring forward the deduction to the current financial year which may be beneficial for tax planning.*
- A flexible investment
A margin loan can be used as a flexible loan facility because it does not require scheduled repayments, allows access to funds for investment purposes as required, and there is no maturity date.
- Liquidity
Unlike other gearing strategies that might use security such as property, most underlying Australian assets can be converted to cash in under 3 days, which can allow you to make the most of market conditions and adjust your portfolio accordingly.
What are the risks?
There are risk factors to margin lending. Some of the key risks include:
- Market Risk
It is possible that the performance of your investments may change, which will result in you earning a lower return or incurring a larger loss than if you had not borrowed to invest.
- Interest rate risk
Interest rates may rise which can impact your ability to service the loan or achieve a desired outcome. An increase in the variable rate will increase your borrowing costs.
- Margin Calls
It is possible for certain events such as margin calls to occur at any time that may result in some or all of the loan being due for payment at short notice or immediately, depending on the nature of the event.
If you are considering how you may be able to fulfil your investment goals using a gearing strategy, a Leveraged margin loan might be able to help you. If you would like to find out more about a margin loan or products offered by Leveraged Equities, please contact us on 1300 307 807.
If you are financial adviser and want to learn more about recommending gearing to your clients, contact one of our Business Development Managers.
Things you should know
*We recommend you obtain your own independent professional and tax advice on the risk and suitability of a margin loan and to determine whether your interest costs will in fact be fully deductible in your own circumstance.
Gearing involves risk. It can magnify your returns; however, it may also magnify your losses.
Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, seek professional financial advice and read the Product Disclosure Statement and Incorporated Statements (together, the ‘PDS’) and Product Guide, together with the terms and conditions applying to the product or service, available at www.leveraged.com.au, before making an investment decision. Not available to self-managed superannuation funds.
The information provided in this document may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.
