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Margin lending explained

A margin loan is a type of investment loan that lets you borrow money to invest in shares, managed funds and other approved financial products.

Using a margin loan to amplify your investing power can be an effective way to build wealth, diversify your portfolio and could offer tax benefits as well. However, just as it has the potential to grow your wealth, if stocks go down in value your losses will be amplified as well. It’s important to weigh up both the benefits and the risks when thinking about investing with a margin loan.

How does a margin loan work?

A margin loan uses existing shares, managed funds and cash as security. These existing assets are used to calculate your Loan to Value Ratio (LVR), which determines how much you can borrow. Once your borrowing limit is established, you can use available funds to purchase further approved investments (shares, managed funds etc). Your new and existing investments are combined to form your total portfolio.

Interest on a margin loan is calculated daily; but how it is paid will depend on the loan. Some margin loans allow interest to be paid in advance.

What are some of the benefits?

Boost your investing power - increasing the size of your investments could amplify your profits in a rising market as well as increase the size of any dividend payments

Diversify your portfolio - access to more funds means you could diversify across different asset classes, industries and companies. This in turn could also help reduce investment risk.

Potential tax advantages - depending on your circumstances you may be able to claim tax deductions for some or all of your borrowing costs.

What about the risks?

Amplified losses - just as borrowing to invest can increase profits, it can also amplify your losses should the market turn against you

Interest rate changes - unless you’ve opted for a fixed rate margin loan, interest rates could change at any time increasing the overall cost of your investments as well as potentially reducing profits.

Margin calls - if the overall value of your portfolio falls to an extent that it exceeds your LVR, you’ll need to resolve/satisfy a margin call.

How does a margin call work?

If the market moves against you and the LVR goes over the borrowing amount, you’ll get what is known as a margin call from your lender. This means you’ll need to top up the balance of your loan to get it beneath the agreed borrowing limit.  There are three different ways you can do this:

  • Top up the loan balance with cash
  • Sell some of your portfolio and use the proceeds to repay a portion of the loan
  • Transfer existing securities not currently being used as security on the loan to increase the borrowing limit
Things you should know

The information on this website has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should consider its appropriateness, having regard to your objectives, financial situation and needs and, if necessary, seek appropriate professional advice. If a Product Disclosure Statement is available in relation to a particular financial product, you should obtain and consider that Product Disclosure Statement before making any decisions about whether to acquire the financial product. The information contained on this website does not constitute the provision of advice or constitute or form part of any offer, solicitation or invitation to subscribe for or purchase any securities or other financial product nor shall it form part of it or form the basis of or be relied upon in connection with any contract or commitment whatsoever. Any securities or prices used in the examples on this website are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not a reliable indicator of future performance. This website may contain material provided directly by third parties. This information is given in good faith and has been derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group nor any of their related entities, employees or directors (together, "Westpac"), nor the Participant, accepts responsibility for the accuracy or completeness of, or endorses any such material. This website may also contain links to external websites. Westpac and the Participant do not accept responsibility for, or endorse the content of, such external websites. Except where contrary to law, Westpac and the Participant intend by this notice to exclude liability for material provided directly by third parties and the content of external websites.