Margin Lending

What is a Margin Loan?

A margin loan can be used to borrow for investment in shares or managed funds using the investments as security for the loan.

An investor with a margin account can usually borrow up to half of the total purchase price of marginable investments. The percentage amount may vary between different investments.

The loan can be borrowed as a lump sum. Alternatively, it can be borrowed in regular instalments to help take advantage of dollar cost averaging or if you want to gradually build your savings.

Loan to Value Ratio

A loan to value ratio (LVR) is assigned to each investment in your loan portfolio. The LVR is the percentage of the investment's market value we will lend you. This will generally lend between 30% and 75% of the market value of your listed shares and managed funds.

Your loan must stay below the LVR at all times. If the value of the loan goes over the allowed LVR either due to interest accumulating on the debt or falls in the market value of your investments, you will need to make a margin call to bring the ratio back into line.

Margin Calls

Regular repayments do not have to be paid on a margin loan but you must ensure the specified loan value ratio is not exceeded.

If the market falls or interest is accumulating on the loan and the LVR is exceeded, you will need to make a margin call to return the ratio to the appropriate level. A margin call request must generally be acted upon within 24 hours.

To make a margin call you may need to:

• Sell assets to repay some of the loan and reduce the level of debt
• Add extra money to repay some of the loan
• Add additional money/investments to the security pool to reduce the debt proportion

Careful planning on how you will deal with a margin call is required. Selling underlying assets may result in selling assets at an unfavourable time and may give rise to a capital loss.

If you take no action or are unable to meet a margin call, the lender can sell your assets to meet the margin call.

The risk of a margin call arising can be reduced by:

• Ensuring the loan is set at an appropriate level below the LVR to minimise the chance of having a margin call.
• Diversifying your portfolio.
• Reinvesting investment income to reduce the debt proportion.
• Not allowing the interest to capitalize by making interest repayments on the loan.

Tax Implications of Gearing

The taxable income generated by the investment is added to your assessable income. Generally, costs associated with borrowing, such as interest and expenses, are allowable tax deductions to reduce tax payable on income from the investment and/or other sources.

Tax minimisation should not be the reason for gearing. This is just an added advantage.

What should I be thinking about?

• Gearing must be considered in light of your investment risk profile. Given that investment returns are variable, it is essential to view a geared investment strategy as a long-term commitment, as this enables you to benefit from the returns of growth assets and to manage any short-term negative market fluctuations.
• Due to the volatile nature of shares and managed funds over the short term, the recommended investment term of a geared portfolio should be a minimum of five to seven years.
• Upon the sale of the investments, you may incur a taxable capital gain which will be added to your assessable income and may impact your entitlements to other tax offsets or other benefits.
• You will incur fees to invest and should consider any initial, ongoing and withdrawal fees that may apply to your investments.
• The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions.

This information is of a general nature. It does not consider your personal objectives, needs or situation. It does not represent legal, tax or personal advice and should not be taken as such. If it has been provided to you with a Statement of Advice (SoA), you should rely on the personal advice in the SoA.

Care has been taken to provide up to date and accurate information relating to the subject area however BR Advice Pty Ltd (ABN 30 612 056 523, AFSL 488655), Blue Rock Private Wealth Pty Ltd (ABN 95 166 927 055, AFSL 452733), Blue Rock Private Wealth (Melb) Pty Ltd (ABN 48 652 202 698, ASIC AFS No. 1298365) and their representatives make no representation as to its accuracy or completeness.

Published: September 2022.

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