Look beyond margin tax breaks

Tax breaks on margin loans from the deductions on pre-paid interest are often the biggest attraction in an investor's mind when borrowing to invest. But a margin loan investment only works if the borrower's total return exceeds the cost of interest and fees after tax. If interest rates rise or the portfolio's value dips, the borrower may well face a margin call. Investors thinking of taking out a margin loan today would be well advised to note that the ASX has recently reached an all-time high. But there are ways to reduce the risk: go with a lender which offers a larger buffer zone, or percentage by which the shares' value may fall before a margin call is made; select a lender with a high loan-to-value ratio and then only borrow part of what's offered – that is, build your own buffer; keep some funds aside to meet unexpected margin calls; and ensure the portfolio is sufficiently diversified across sectors and regions.

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