Lofty hopes – making investment returns soar sky high
More and more ordinary investors are realising that margin lending is no longer just for the wealthy or the brave – it's a tool being used by many people to make their money work harder for them. Using existing shares, managed funds, cash etc as security, a margin lender will lend you funds to build a larger investment portfolio.
Margin loans generally start at a minimum of $40,000 and a lender should have a broad range of investments to choose from – up to 300. The lender nominates a percentage of the market value of each investment, which is the maximum amount it will lend against that share or managed fund. You can probably borrow between 40 and 70 per cent of the valuation. No repayments are necessary – the lender holds your shares or managed funds units as security – but interest repayments are required up-front or monthly, generally at about 7 per cent.
Phillip Hunt of Hunt Financial Services says that an investor with, for example, $30,000 will do much better using a margin loan than simply investing the money. The tax benefits of margin loans are also advantageous: if dividends are franked you're entitled to a franking credit rebate.
But while margin loans can magnify your returns, they can also increase your losses if the investment falls in value. This will mean that the lender will ask you to put in more money or additional security to restore the loan-to-value ratio; this is known as a margin call. When a market is falling, several margin calls may be made during the term of a loan. This is when novice investors get nervous and may be more comfortable investing in managed funds rather than shares.
St George's Andrew Black says that investors have to put some risk strategies in place, for example cushioning yourself against a fall in value and diversifying your investments across different sectors, which is easier to do through managed funds.
Marginlendingchoice.com.au offers comparative information to help you pick the right margin loan.