Margin lending
Margin lending is borrowing money which you use, in addition to your own money, to invest in financial products such as shares and managed funds.
The Benefits
The benefits
- Margin lending can give you an opportunity to increase the size of your investments and to diversify your investments.
- Borrowing allows you to invest at a time you want to invest, helping you to avoid missing out on investment opportunities.
- Interest on borrowed funds is generally tax deductible provided the funds are invested in Australian assets for income-producing purposes.
Please note: Deriving a tax benefit should not be your core focus. You should seek qualified tax advice from a registered tax agent so that you fully understand your personal tax position.
Borrowing limits
Margin lenders generally only allow you to borrow up to a certain value, or percentage, of the shares you wish to buy.
Commonly, limits are set at a maximum of 75% (known as the Loan-to-Value Ratio or LVR) of the value of the shares (less if the share is more speculative or risky). This means you have to make up the difference (i.e. 25%) with your own cash or existing shares. This difference is referred to as the “margin”; hence the term “margin lending”.
What are the risks involved?
Any borrowing strategy should always be approached with caution.
While borrowing to invest has the ability to leverage returns from investments, it also heightens investment risk. Margin lending should be implemented as a long-term investment strategy to allow time to overcome any market volatility and for the leveraging effects to work.
Borrowing to invest can be an effective long-term strategy for wealth creation as long as you understand the risks and the impact gearing may have on your overall returns.
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