CHOICE guide to margin loans

Borrowing to invest can make your money work harder but it's a risky strategy in a volatile market.
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01 .Borrowing to invest


Top tips

  • Borrowing to invest — for example, a margin loan — can be a very effective strategy to build your wealth, but it’s not for everyone. You need to have excess income, be a savvy investor and happy to take risks.
  • Because you’ve more money to invest, your investment gets a 'turbo boost' and gains are magnified. But if your investment loses money, losses are magnified too. Not only have you made a loss but you still have to pay back the loan.
  • Be aware of the current volatile share market environment, get financial advice and have a strategy in place for meeting a margin call.

A margin loan allows you to borrow money to invest. The margin loan is secured against the investment you make with it and/or other investments you have.

You’re not allowed to borrow the full amount of your investments but just a percentage called the LVR – Loan to value ratio. This is usually between 30% and 70% of the value of your investment in shares or managed funds.

For example, if your lender sets the LVR for a range of shares at 70%, it’ll lend you up to $70,000 to buy $100,000 worth of those shares. So by investing just $30,000 of your own money you could build up a portfolio worth up to $100,000, investing in shares spread over different share market sectors and managed funds.

But if you borrow up to the limit and the value of your investment falls you may receive a margin call and have to make up the difference. You may have to sell part or all of your investment at a loss. And if this happens at a time when the sharemarket suffers huge losses like in late January 2008, it may be the worst time to sell.

Please note: this information was current as of February 2008 but is still a useful guide to today's market.

Is a margin loan suitable for you?

Borrowing to invest is a high-risk strategy. You need to be a savvy investor or get good advice from your adviser or broker to find a good investment in the current volatile share market climate.

Before committing yourself to a margin loan, ask yourself if you have the following:

  • Enough excess income to cover the interest payments, even if the interest rate suddenly goes up or your investment makes a loss.
  • A long-term investment perspective and the ability to cope with making a loss for some time.
  • A secure job — or the ability to cover the interest payments if you lost your job.

Equity loans — an alternative

Have you already paid off a big chunk of your mortgage? If so, a home equity loan/line of credit may be a better way for you to borrow to invest, as the interest rate is generally cheaper. However, the same risks apply as with other forms of borrowing, and your house is on the line too.


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There are risks with margin loans. If you borrow up to the limit and your investment value falls, your lender may give you a 'margin call', and ask you to make up the difference in value.

On a normal day, just over 0.1% of the over 190,000 Australians who have a margin loan receive a margin call. On 22 January ('Black Tuesday') one of the large lenders told us about 2% of their clients received a margin call. About half paid back part of their loan and the majority of others had to sell part of their investments. In some cases the lenders sold the investments, as they couldn’t contact the clients.

Faced with the current volatility in the share market, it’s essential for you to try to reduce the likelihood of a margin call and have a strategy in place in case it happens.

How to meet a margin call

A margin loan does not allow you to borrow the full amount, but only a percentage of what you invest the money in, called the investment’s loan to value ratio or LVR. It’s usually 30% to 70% for shares, managed funds and other securities. The LVR determines how much money the lender will loan you against the security.

But if your investment falls in value, you may receive a margin call from your lender. Typically a lender may allow you to exceed the LVR by a percentage such as 5 to 10% before a margin call is triggered.

Once a margin call is made you'll need to top up your investment and also restore the full amount of the buffer.

For example, your lender sets the LVR for an 'Xbank' share at 70%, it’ll lend you $70,000 to buy $100,000 worth of those shares. If the value of these shares now falls by 10% to $90,000 and your lender only allows a 5% buffer margin, they will call you and ask you to make up the difference. At this point you can:

  • Pay back part of the loan A portfolio worth $100,000 allows you to borrow $70,000 (70%). As your portfolio is now worth only $90,000, you can now only borrow 70% of that, which is $63,000. So you need to pay back $7000 in cash.
  • Lodge some more shares as security You need to restore the value of your portfolio to $100,000. In a best-case scenario you have some more shares with an LVR of 70% — you need to lodge shares worth $10,000. But if their LVR is only 30%, you have to lodge shares worth $23,333. And if your lender doesn’t have the shares on its approved list you can’t use them at all.
  • Sell part of your portfolio to pay back into the loan In this case you need to sell about $23,350 worth of shares. This leaves you with an investment worth $66,650 and a loan of $46,650 (about 70% of $66,650).
  • Stay contactable Make sure your lender can always contact you or another nominated person you trust, even when you’re on holiday or have other commitments. You have to respond quickly to a margin call (usually within 24 hours). If your lender can’t contact you, it’ll make the decision for you.

Checklist — what you need to know

Make sure you fully understand your loan features and the details of the contract. For example:

  • The lender may be able to change the LVR at any time or even take your investments from their approved list — this could trigger a margin call.
  • The lender may be able to sell your investments without your go ahead, for example, if you can’t meet a margin call, if they can’t contact you after a margin call or if there is a significant fall in the sharemarket as a whole.
  • Check establishment, transaction, and early termination fees that may apply to the loan.
  • How does the interest rate compare?
  • What's the buffer margin? Typically a lender may allow you to exceed the LVR by a percentage such as 5 to 10% before a margin call is triggered. Once a margin call is made you'll need to top up your investment and may have to also restore the full amount of the buffer.
  • How and when will the lender contact you? A lender may already contact you when you’ve reached the buffer which allows you to take action before you get a margin call. Lenders may use email, sms and phone.
  • Are all the investments you want to invest in on the lender’s approved list?

How to reduce the risks

The most effective strategy is to reduce your borrowing level. For example, if the lender allows you to borrow up to 70% of the value of the shares you could just borrow 50% or even only 35%.

Other strategies to consider:

  • Pay interest regularly Margin lenders may allow you to add the interest to the loan, but of course this simply increases it and thus your borrowing level.
  • Reinvest Credit your investment income (such as dividends) to your loan, or reinvest it.
  • Closely monitor your investments and your borrowing level This gives you the opportunity to intervene (for example, by paying back part of the loan) before it comes to the margin call.
  • Diversify your portfolio If you only buy shares in one company your investment will be very volatile. By diversifying your portfolio into shares from different sectors and managed funds, you decrease this volatility and might have a better return in the long term.

Before going ahead with a margin loan, make sure you do your homework.

In particular, consider getting professional financial advice and taking out insurance such as income protection in case you can’t work because you’re sick, and life insurance to cover your dependants.

  • The Financial Planners Association (FPA) can give you a list of planners in your area. Contact FPA on 1800 626 393, or visit its website:
  • The Australian Securities & Investments Commission (ASIC) has information about margin loans on its consumer advice website:
  • The National Information Centre on Retirement Investments Inc (NICRI) provides free information about financial planning and specific investment products. Call 1800 020 110 or (02) 6281 5744 or visit the website:
  • NICRI’s moneymap website: has a number of calculators to work out loan, investment and savings scenarios.

Weighing up the tax advantages

Borrowing money to invest is called gearing. The main tax advantage is that you may get a tax deduction for the interest you pay on your loan and other investment costs.

Don’t let tax advantages cloud your judgment. Assess the investment on its own merits and treat tax advantages as a bonus.

For more information contact the tax office on 13 28 61 or visit its website: