Why borrow to invest?
- Access additional funds for investment which may help you reach your financial goals faster.
- Potentially increases the size of your investment returns.
- Interest payable on a margin loan may be tax deductible.
- May defer taxation on potential capital gains, as you do not have to sell your existing investments to make new investments.
- Allows you to diversify your portfolio. A larger range of investment choices could increase your returns and reduce the risk that poor performance in any one investment will drag down your total return.
Like any investment, a margin loan involves some risk. While borrowing to invest more money in shares and/or managed funds may increase potential returns, it can also increase potential losses. The most common risks associated with margin loans are:
- Margin calls as a result of market volatility and/or high gearing levels
- Increase in borrowing costs, i.e. interest rate increases
- Reductions in loan to value ratios assigned to securities.
A margin call usually occurs when the market value of your security portfolio falls significantly, which in turn will reduce your borrowing limit. This will also cause a rise in your gearing level, as your loan balance has not changed. If your current gearing level exceeds your maximum loan to value ratio, a margin call may occur. To provide you with some breathing space in this instance, we offer a buffer, which is added to the market value of the approved securities in your portfolio. The buffer is currently 10%, and ensures that small market fluctuations do not trigger a margin call.
Margin lending product information
Download the latest details of acceptable securities and loan to value ratios:
Acceptable Securities List (Westpac Online Investment Loan)
Margin loan case study
Jim's existing portfolio
Jim has an existing portfolio valued at $50,000. He works out that he can borrow up to $116,000 if he takes out his maximum loan value and invest $166,000 (assuming a loan to value ratio of 70%).
How he invests
He chooses to borrow $50,000, giving him a total amount of $100,000 to invest (including his existing portfolio worth $50,000). Jim also chooses to prepay his interest in advance, as it is tax deductible based on his own personal financial circumstances.
Jim can now invest the borrowed $50,000 in securities he selects from the approved securities list.
Options for the future
In 5 years' time Jim intends to cash in his portfolio. If at this time it has increased in value, he will be able to pay off the loan and keep any extra amount.
Effect of a margin call
During the 5-year period there may have been a margin call. This would have been made if the amount Jim owed was more than his portfolio security value, and he would have had to put in additional capital of his own, or sell part of his portfolio to restore the margin.