Margin lending

Margin Lending involves borrowing money to increase the size of your investment portfolio. The investments currently in your portfolio are used as the security for your margin loan, just as a house is the security for a home loan. Like a home loan, interest is payable to the lender at current interest rates[1].

The table below illustrates the effect of Margin Lending when there is a 10 percent rise and 10 percent fall in the value of an investment portfolio:

ML chart

Based on the above example, it shows that Margin Lending provides an additional level of risk over and above the risk that already exists within an investment portfolio. Margin Lending is not appropriate to all investors for this reason.

Many investors find that to achieve their financial goals and resulting lifestyle they need a higher long run return and therefore elect to take on leverage to achieve this outcome.

In foreign markets, such as Australia, leveraged investment portfolios are common specifically amongst the young to middle aged investors who are saving regularly and seek a tax effective approach to maximize their savings as the interest cost is generally tax deductible.

The primary advantages of using a Margin Lending facility are:

  • Increased returns where the portfolio value increases by more than the Margin Lending interest rate.
  • A way to free up equity without having to sell from your investment portfolio.
  • Increasing diversification by having a larger investment portfolio.
  • Better economies of scale as larger portfolios have lower fees
  • Interest on the facility is generally tax deductible.

The primary disadvantages of using a Margin Lending facility are:

  • Increased losses where the portfolio value decreases, and therefore more risk to the portfolio.
  • If the facility limit is exceeded, then a margin call could be issued requiring an immediate deposit of cash into the portfolio or the sale of investments at an inopportune time.

You can typically borrow 50 percent to 70 percent[2] of the value of approved securities, however we would not advise borrowing at or near the maximum amount as market movement could result in a margin call.

If you have further questions or are interested in using a Margin Lending facility with your Stewart Group investment portfolio, please phone us on 0800 878 961 to arrange a meeting where we can discuss the appropriateness of a Margin Lending facility for your individual circumstances.