Margin Lending

Gearing, or borrowing to invest, enables investors to increase their investment exposure. In a rising market, margin lending will magnify gains, but it should be kept in mind it will similarly magnify losses in a falling market. This page is provided as information and is not financial advice - investors should seek professional advice if they are considering a margin lending.

Margin lending - a margin loan is generally defined an interest-only line of credit secured by shares, managed funds or cash. The amount an investor is able to borrow is determined by how much security they invest themselves and the lending valuation ratio (or LVR) for a particular security. Lenders will have an acceptable securities list (or ASL) that informs investors which managed funds and shares can be borrowed against, and the LVR for the security (typically between 40% and 70%).

Interest is paid on the loan balance, but there is no ongoing principal repayment requirement with margin lending. The investor can, of course, make lump sum repayments whenever they choose to, and/or use dividends and distributions to repay the principal.

In technical terms, a margin call occurs when the loan to valuation ratio exceeds the borrowing limit and the buffer of a margin loan. Most margin loans will have buffer of up to 10%, but as soon as the loan balance exceeds the buffer a margin call will be initiated by the lender. A margin call involves the lender contacting the investor and requesting that the investor take steps to bring the margin loan back within the LVR. The margin call must then be addressed by the investor, typically by adding further security, selling securities, or paying down the loan balance.

In the event that the margin call is not addressed, the lender may exercise its right under the loan agreement to sell securities to bring the loan back within the LVR.

To minimise the chance of margin calls, it is worth borrowing an amount that is well below the maximum allowed LVR for the security. It is also important to hold a diversified portfolio to avoid having all your eggs in one basket, and rebalance your portfolio regularly to avoid deviating from your financial plan.