Margin loans

Make investing in shares possible with a margin loan.

Margin loans and equity lending

Looking to take a step into the world of shares but don’t quite have the financial means to do so? Your best bet might be a margin loan, a form of financing for that exact purpose. There’s plenty to consider when it comes to investment finance, so you should be across all the ins and outs before committing to anything. Read more about margin loans, how they work and how you should compare them in this comprehensive guide.

What are margin loans and how do they work?

Margin lending is a type of loan designed to fund investment in areas like shares or managed funds. They serve as a great way for investors to make their move on the stock market even if they don’t have the funds to do so at the time. Generally, margin loan borrowers won’t make financial contributions to their loan principle; rather, the focus will be on maintaining their loan-to-value ratio (LVR) at a reasonable level and paying interest on their loan.

Security for your loan is placed in the shares that you purchase, which can fluctuate in value over time. This means that your LVR can change often throughout the course of your loan, which is an issue to be wary of. Lenders will implement restrictions on the maximum LVR when it comes to margin loans, which is often around 70%, meaning that if your lender is putting up more than this amount of funds, they can charge you a fee.

How do I compare margin loans in Australia?

There are a multitude of ways in which you can compare different investment loans. Take a look at the list below to see how you should be assessing options on the market. Ensure that you have a good grasp across these areas before committing to any one loan or lender.

Type and cost of margin loan interest rates

Interest rates are amongst the most important aspects of any loan to consider, and margin lending is no different. Fortunately for prospective borrowers, it’s a simple point to compare. Each lender will have their margin loan interest rates listed prominently on both their own websites and on Savvy; our comparison tools ensure that this factor is well-covered.

What is also a relevant consideration for margin loan borrowers is the structure of interest rate that they choose to go with. Variable rate margin loans are, as the name suggests, beholden to market movement when it comes to determining interest rates at any given time, meaning you can experience both rate falls and rises. Fixed rate margin loans lock in their interest rate over an extended period, which may be more expensive but bring with them stability in terms of interest payments.

Fees

It’s not just interest rates that you’ll have to look out for, though. Fees can mount up and end up costing you a substantial amount if you’re not careful. You may have to pay an application fee under certain circumstances, which could set you back several hundred dollars, but you might be able to avoid this if you’re applying by yourself or on behalf of a company.

You may also be charged with fees associated with maintaining your account, such as a general monthly or annual maintenance fee, and closing your account early, especially for fixed rate margin loans. In addition to these, depending on the lender you go with and the services they provide, you will be charged a brokerage fee to cover the cost of your broker buying and selling shares on your behalf. This fee is charged by the broker, rather than the lender, although you’ll usually find that they’re one in the same with margin loans.

LVR requirements

Different lenders will have different restrictions in place when it comes to the maximum LVR they’re willing to permit for their margin loans. If you’re looking for loans with a greater LVR, you’re probably going to land on a lender offering 70% LVR loans ahead of those whose maximum sits at 60%, for example.

Maximum loan amount

Similarly, if you want to borrow either a small or large amount for investing, you’ll have to look for each lender’s criteria when it comes to the minimum or maximum loans available to borrowers. These also aren’t the same across the board, so keep an eye out for lenders whose requirements match your needs.

Any other loan features

Margin lending can come with some handy additional features that can improve your borrowing and investment experience. Some lenders will allow you to make advance interest payments, which can cut down on your owed total up front and alleviate some financial pressure later down the track. If you’re looking to trade in international shares, you’ll have to look for that specific feature, while you may also be able to take advantage of instalment gearing, which facilitates top-ups of your capital throughout the life of the loan.

The pros and cons of margin loans

Take a look at some of the pros and cons when it comes to investment loans if you’re still considering your options

PROS

Boosting your gains

Raising the amount of money you invest in shares will, in turn, increase the amount you’ll stand to gain

Gets you on the market

Even if you don’t have the funds you need to take your first steps into stocks and trading, a margin loan will be able to help you achieve that

Tax-deductible interest

In most cases, you’ll be able to claim margin loan interest payments on tax

CONS

Tax-deductible interest

In most cases, you’ll be able to claim margin loan interest payments on tax

Potential for rate rises

If you’re on a variable rate margin loan, an increase in interest rates during your loan term could end up costing you a lot of money

More difficult to endure falling markets

Because your margin loan has a minimum requirement for LVR, enduring market falls can be more difficult, and you may have to sell prematurely as a result

Frequently asked margin loan questions

Have any more questions about margin loans? Here are some of the most common that people ask

Are margin loans worth taking out in Australia?

If you’re looking to buy and invest shares but don’t have the financial means to do so, margin loans may be one of few options available to you. If you invest in the right places, margin loans can leave you far better off than where you started. You should always understand the risks of margin loans before taking out financing for share investment, though.

How do I access the best margin loan rates?

It’s always best to do your research when it comes to finding the best margin loan and doing so can help you save considerably on interest. Proving yourself financially capable of servicing your chosen loan will also be a great help in increasing your lender’s trust in you as a borrower, while an existing portfolio can show that you’re an experienced trader. Also, paying your interest in advance annually could save you a meaningful amount on your margin loan.

How do I qualify for a margin loan?

Borrowers will have to meet their lender’s criteria before proceeding with their margin loan application. You’ll have to be over the age of 18 and either be a permanent resident (individual) or be established in Australia (trusts/companies). Alongside showing your ability to service the loan, you may also have to meet requirements relating to a set gross income and minimum credit limit. With CommSec, for example, these are $50,000 p.a. and $20,000 respectively.

To obtain your loan, you’ll have to provide security if the loan agreement falls through. This can come in the form of existing shares or managed funds that you own or cash from your savings. You may also require existing asset backing to qualify for a margin loan, namely owning a home or other similarly valuable assets.

Can I still make contributions to my loan principal?

Yes – this can be a great way to ensure that your LVR stays below the required limit. Also, if your loan balance is lower, you probably won’t have to pay as much in interest.

Can I use my home equity to invest in shares instead of a margin loan?

Yes – if you have sufficient equity in your home, you’ll be able to take out an equity loan to perform the same role as a margin loan. While this may reduce the interest rate that’ll apply to your loan, all of the same risks associated with investing still apply with equity loans.

What is a margin call and how can it affect my loan?

A margin call is a preventative measure enforced by lenders to ensure that the LVR limit on your margin loan isn’t breached. This can happen if your shares decrease in value, which lowers your personal stake in the loan. If your LVR rises above the required limit, your lender will contact you and request that you provide more funds to bring it back down. If you’re unable to do so in this instance, your lender may sell some of your shares to ensure LVR requirements are met.