Borrow money to invest with margin loans. Are they an option for you? What are the risks you must consider? Monzi’s here to explore it all. Read on for our comprehensive margin loan guide. Let’s go.
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
Margin loans: what are they?
Margin loans, also called investment loans, are a type of loan that allows you to borrow some money that you can then use to invest. With this, margin loans are similar to home loans. In the same way that home loans are secured against your property, margin loans are secured against your shares.
How do margin loans work?
When applying for a margin loan, you’re going to need to supply starting capital, like you would supply a cash deposit for a regular loan. This capital can be in the form of cash or various securities that you already own – you can refer to the Approved Securities List (ASL) to find out which securities qualify.
The amount you may be able to borrow is dependent on the securities in your portfolio. These securities amount to a Loan to Value Ratio (LVR) which equates to your financial position. Once your desired margin loan is approved, you can begin purchasing more securities, thereby increasing your LVR.
What is an Approved Securities List (ASL)?
An ASL lists all the forms of capital that your potential lender will accept as collateral for your loan. If you already have shares that are listed in the ASL, then you can use them as the collateral. If you wish to purchase some of the shares listed in your lender’s ASL, your lender will loan funds up to the LVR for that security, to you.
What is a loan to value ratio (LVR)?
As previously mentioned, LVR stands for loan-to-value ratio. Essentially this ratio is the calculation lenders use to gauge the size of your loan as a percentage of the value of the shares you are buying.
Lenders may use your LVR as a deciding factor. It helps the lender assess your ability to repay what you borrow. It also influences your deposit. If your deposit is larger, then, in most cases, your LVR will be lower.
What is a good LVR?
An ideal LVR is 80% or under (e.g. borrowing $8,000 for a $10,000 purchase). This is because lenders consider this safe. An LVR of 100% is considered very high, and may significantly decrease your chance of being approved for a loan. Keeping your LVR lower is ideal as it may prevent you from incurring any additional fees to complete the loan.
You may be able to decrease your LVR in multiple ways. The first option is to reduce the amount that you are looking to borrow. Thereby, decreasing the difference between your deposit and loan amount. You can also wait for a while and try and build a larger deposit, although this may not be practical depending on your time frame.
Alternatively, you may be able to ask a family member to use some of their equity to secure the loan. Having a guarantor co-sign your loan can allow you to access greater loan amounts. However, your family member must think about the risks associated with guaranteeing your loan.
Gearing and margin loans?
Gearing is the practice of borrowing money for investment purposes. Whilst typically used regarding investment properties; margin lending is a form of gearing.
Gearing’s purpose is to increase your wealth accumulation by investing your capital alongside your borrowed funds. For effective gearing, the return from investments should exceed the costs of the investment and the loan. If you are to be successful, you may need to be comfortable with borrowing and investing related risks.
What can you buy with a margin loan?
Margin loans allow you to borrow money that you can invest in:
- Managed funds – teaming up with other investors and pooling together your money which is then controlled by a professional investment manager.
- Shares – an indivisible unit of capital. Buying shares of a business means to purchase small portions of the company’s capital.
- Exchange-traded-funds (ETFs) – a collection of securities that can be traded on an exchange.
Do you repay a margin loan?
To ‘repay’ your loan, you cash in your margin account. This means that you close or sell off whichever investments are showing in said account. This works well if your stocks have increased in value. After all, you can sell your stock and repay the margin, ending up with a profit.
However, if the market drops, you could make a loss. Which may mean your shares could sell for less than you have to repay. Obviously, this is one of the key risks you must consider before borrowing to invest.
Why should you borrow money to invest?
Borrowing to invest is useful in many situations. In short, it helps provide you with flexibility in your investing. It can potentially increase your investment returns, as well as make the margin loan’s payable interest, tax-deductible.
Having additional funds also allows you to reach your financial goals quicker and defer capital gains taxation. Along with diversifying your portfolio, borrowing to invest may be able to give you more wiggle-room for a better return.
However, these are the potential benefits. There are risks and downsides that must be considered too.
Are margin loans a good idea?
Perhaps you consider yourself business savvy, or maybe you’re just lucky, either way, margin loans are regarded as a high-risk/high-reward investment strategy. Buying shares is only profitable if they raise enough for you to pay the loan and interest back.
The downside though is that should prices drop, you may suffer losses. Obviously, this is true with all share investments. However, the fact that you’ve borrowed the funds may make this more severe.
In any case, whether it is a good idea will depend on your financial situation. Monzi cannot provide any financial advice. So, assess your circumstances or approach a qualified financial advisor to determine if it may be an option for you.
How risky are margin loans?
As mentioned, whether you make a profit or a loss is mostly dependent on luck and trends in the market. The biggest risk comes when stocks fall. If they fall an average amount and you sell your shares, you may only be left with part of your original payment, once you repay the margin loan. If they fall more dramatically, you could lose all of this original investment and still owe your repayments and interest.
The amount you invested determines how seriously this will put you in debt. This is what makes borrowing to invest such a risk. There may be serious room for failure if the stock market is to crash or perform poorly. As a result, you must understand the risks and potential losses before applying.
A margin call is when your brokerage contacts you to inform you that you must immediately deposit more ASL approved securities or cash to meet the minimum equity requirement. This occurs if your stocks drop in price to below the minimum equity requirements.
So, what happens if you don’t address the margin call? Well, your brokerage, without consulting you, can close the positions in your portfolio. Worse still, they can sell your shares. This means you will be left with none of the return from the shares, while still owing the brokerage your repayments.
Managing the risks
If you choose to go ahead with a margin loan, the following tips may help you stay on top of your account and negate the possible risks.
- Pay any margin loan interest regularly – your monthly interest accrues to your account, whilst this interest is usually lower than credit card interest, it may be in your best interest to be timely with your repayments.
- Be prepared for any possible margin calls – a smart idea is to set up a ‘trigger point’ which is a point above your minimum equity requirements, to warn you early that you are approaching a margin call.
- Monitor your loan, equity, and investments – knowing what is happening in the stock market and with your portfolio may help prevent danger down the line.
- Do not ignore a margin call – as previously mentioned, ignoring a margin call may be extremely risky as it could put you into debt depending on the actions of your broker.
How to choose a margin loan
So, you’re applying for a margin loan? Depending on who you take a margin loan from, there may be desired or undesired features of that loan. Some when you’re comparing loans, some things to consider could include:
- Fixed or variable – with a fixed loan, you may be able to pay the interest in advance. This may also be tax-deductible. On the other hand, a variable loan rate may fluctuate with the market, meaning you will most likely pay the interest at the end of the month.
- Whether or not international shares are available to you – not all margin loans allow you access to purchasing international shares. So, if this is something you would like to do, ensure you will be able to before taking the loan.
- Whether your margin loan has ‘Options’ – call options are another investment avenue that may enable you to take advantage of subtle market conditions. For example, you may be seeking covered call options. Not every margin loan will allow this, so it may be worth shopping around.
Comparing and calculating margin loans
Margin loan comparisons and calculators can make comparing loan options simple. There are plenty of sites available online that will compare available loans.
Typically, all you need to do is input the investment type, the loan type, and the required amount. This should generate you all the available options, and make it easier for you to pick the loan that is right for you.
You can calculate your returns by entering your existing shares, and cash available to invest. Then select your loan’s amount and the investment loan rate, and the calculator should generate your expected terms. However, all figures you receive will be estimates. As a result, you should only use them as a guide.
For more information, check out Moneysmart’s useful guide covering “borrowing to invest.”
Do you need an investment broker?
An investment broker is an agent who will handle all of your investment transactions on your behalf. These transactions include the buying and selling of investments. To invest in the stock market, you will need a broker. This is because investment brokers have the required licensing to make the required trades with security exchanges.
Don’t stress though, brokers are not overly expensive, depending on the firm that they work for and the type of broker they are. You can hire an expert, or full-service, broker. These brokers typically work for a firm and are best for individuals with strong portfolios, that want these portfolios expertly managed.
Alternatively, you can hire a discount broker. Discount brokers will not review your portfolio, instead, they will simply execute your desired trade orders.
Typically, brokers charge per trade. However, prices do vary and Monzi cannot say with certainty how much you will be charged. As a result, you must do your own research.
Margin loan tax benefits
Margin loans may have potential tax benefits. Depending on the criteria of your loan, the below points may make your margin loan tax-effective:
- Franked dividends can be generated by Australian shares, these yield credits that can be used to offset certain tax liabilities.
- The interest you pay on your loan may be tax-deductible.
- You may be able to get additional tax deductions for any interest paid up to twelve months in advance.
- Borrowing against your existing portfolio may potentially create a capital gains tax event.
Margin loans vs investment property loans
investment property loans are in a similar vein to margin loans. Lenders offer these loans when you intend to buy an investment property.
Typically, an investment loan is quite similar to a regular variable rate home loan. You pay your deposit and receive the amount required to buy your investment property. Once you’ve agreed to the loan, you make your principal and interest repayments until the balance is paid off.
However, investment loans differ from home loans in terms of approval conditions. Investment loans may require a lower LVR, meaning your lender may request a larger deposit than would be required for a typical home loan.
In addition to this, the interest rate may also be higher with investment property loans, which is important to keep in mind before taking this path. As a result, you should shop around and compare your home loan options.
Negative and positive gearing
As previously mentioned, gearing is the act of borrowing money to invest. It is commonly associated with the concept of investment properties. In regards to investment properties, the amount of income you earn can be positively or negatively geared:
- Negatively geared – your investment is negatively geared when the return you receive from your tenants is less than the property-related expenses you incur.
- Positively geared – your investment is negatively geared when the return you receive from your tenants is more than the property-related expenses you incur.
Purchase price vs lender valuation
One aspect of investing in property that may be useful to keep in mind, is the difference between a property’s purchase price and the lender valuation. Typically the official valuation of a property will not align with the sale price. This can impact your LVR.
If your valuation is higher than the purchase price, your LVR may decrease since you will be borrowing a lesser amount of the overall value. However, if your valuation is lower than the purchase price, this may generate an LVR over 80%, and you may have to pay a lender’s mortgage insurance (LMI). Alternatively, if your LVR is over 80%, your lender may refuse to lend to you. Consider an independent valuation to possibly avoid this.
Lender Mortgage Insurance (LMI)
As mentioned, an LMI is incurred when your LVR is over 80%. That is, you are borrowing more than 80% of the property’s value. As a result, a higher LVR means that the risk surrounding a possible loan may increase. But what is an LMI?
Put simply, it is a premium added to your loan. It is paid only once and is not refundable or transferable. The way your LMI is calculated is dependent on how much you are borrowing, and the size of your deposit. If you are able to contribute a higher amount to the property’s purchase price, this LMI will decrease.
Rental expenses you can claim
Becoming a land-lord doesn’t guarantee you immediate profit; it may be handy to keep this in mind when borrowing to invest. There are many costs associated with the role; however, provided your property is available for rent or currently being rented, you may be able to claim some rental expenses as tax deductions.
According to the Australian Taxation Office, some of the expenses you may be able to claim include insurance, repairs and maintenance, water charges, advertising for new tenants, pest control, and land taxes. The list is more extensive than this; these are only some examples. Do your research to determine how this may apply to your situation.
Items that are not investments
Whilst there are a plethora of things you can invest your money in, you should be aware of the things that are non-investments. First and foremost, your car is not an investment. It may not be wise to assume you can invest in a vehicle. As soon as you drive a new car off the lot, it will begin to depreciate. If you are considering buying a car, you may be better off taking out a standard car loan.
Same goes for your TV and other homely possessions. If you are borrowing to invest, consider investing in property, the stock market, bonds, gold, or mutual funds. As mentioned, borrowing to invest has its risks, so it may be best to ensure you are well informed.
Monzi: the service for you
Have you considered the Monzi lender-finder and using a personal loan as an alternative to a margin loan?
Through our lender-finder service, you can potentially borrow cash amounts online from $300 to $10,000. While our lenders won’t be able to offer margin loans, you could access the money you need to cover a range of expenses.
So, whether your car has broken down or you’re looking to complete a few home improvement projects, turn to Monzi. We may be able to pair you with an available lender from our network in just 60 minutes.
Applying with Monzi
So, how do you apply?
Just follow these easy steps:
Monzi is 100% online and ready whenever you are. All you have to do is scroll to the top of our page and input how much you would like to borrow and how long for. Then our site will generate an estimate of your weekly, fortnightly, and monthly repayments. Keep in mind that this is only approximate and all costs are subject to individual lenders. Once you’re happy, simply select ‘Apply Now’.
We’ll do our best to match you with an available lender from our network. Provided you have submitted your application within business hours, we may be able to match you to a lender in as little as 60 minutes.
If we find you a lender willing to assess your loan, we’ll pass your application to them. From there, they will contact you. If your lender approves you, they will send you their contract. If you agree to their terms, sign away, and the money will reach your account shortly after.
How much can I borrow with Monzi?
Whether you need a small cash amount to see you through or a large amount to cover a significant purchase, Monzi may be able to help.
In short, we work with lenders who may offer loans with fast approval from $300 to $10,000. With this, they’re typically divided into three categories, with each having their own unique features. See below for more details:
- $300 to $2,000
- You aren’t required to secure the loan.
- Repaid over 12 months
- $2,100 to $4,600
- Secured loans
- 13 to 24 month repayments
- $5,000 to $10,000
- Repaid over 13 to 24 months
Have any questions about accessing personal loans online? Get in touch with Monzi.
Email us at email@example.com and one of our team members will get back to you with a response.
Note, however, that we are only a lender-finder service. As a result, we can only answer questions that relate to our organisation and service.
Margin loans and Monzi
While we cannot say whether you will be able to access margin loans, Monzi works with lenders who may offer cash loans from $300 to $10,000. Best of all, you can use these quick cash amounts to cover almost any legitimate expense you encounter.
So, do you think Monzi’s right for you?
Scroll up and apply today!