A margin or investment loan enables you to borrow money to invest in approved shares or managed funds. Technically it is a form of gearing and you may use your cash, shares or other managed funds as security for the loan. The amount that you can borrow is determined by the securities in your portfolio, their Loan to Value Ratio and a credit limit based on an assessment of your financial position.
It is important to understand that whilst margin loans allow you to borrow more money to invest, they can also increase your potential losses. To help familiarise yourself with the potential risks we have listed the main risks below
Margin calls may eventuate if the value of your security portfolio decreases considerably. This will also cause a rise in your gearing level, as your loan balance has not changed. If your current gearing level exceeds your maximum loan to value ratio, a margin call may occur.
At St George, we provide a buffer to provide some protection during these instances. This buffer is currently 10% above the market value of your securities. The buffer prevents minor market fluctuations from resulting in a margin call.
Paul currently has a $50,000 share portfolio. Assuming a maximum LVR of 70%, Paul can borrow up to $116,000. With his existing $50,000 he can invest a total of $166,000.
He chooses to borrow $50,000, giving him a total amount of $100,000 to invest (including his existing portfolio worth $50,000). Jim also chooses to prepay his interest in advance, as it is tax deductible based on his own personal financial circumstances.
Paul can now invest the borrowed $50,000 in securities he selects from the approved securities list.
In 4 years Paul decides to sell the shares he purchased with the borrowed $50,000. If his securities have increased in value he can pay off his loan and withdraw the additional amount.
If during these 4 years Paul’s security value dropped below his loan balance he may have experienced a margin call. This would mean that he would have to use his own capital or sell off some of his portfolio to restore the margin.
Learn more about Bank of Melbourne Margin Lending.
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