Margin lending snapshot guide
Margin lending allows investors to use shares or managed funds as security for investment loans.
The average minimum loan is between $20,000 to $40,000, with the amount that can be borrowed depending on an assessment of the security stock. For example, an investor would need at least $17,000 of stock as security, if geared at 70 per cent, to borrow $40,000.
Margin loans can offer tax advantages, as borrowers may be able to pre-pay interest and thus bring forward the tax deduction for interest payments for the following financial year, as long as the period is less than 13 months.
Volatility can come into the picture when investors have to restore their margin loan gearing ratios through a margin call. This occurs when the loan balance exceeds the loan limit, plus a buffer, on the portfolio. The investor must then supply additional cash or security by noon the next day, to restore the loan to the buffer.
To provide a certain comfort level, the investor should monitor his investments, maintain conservative gearing levels, pay monthly interest charges, get dividends and distributions credited to the loan or reinvested, and diversify the portfolio to reduce risk.