Margin lending is a type of loan that allows you to borrow money to invest, by using your existing shares, managed funds and/or cash as security. It is a type of gearing, which is borrowing money to invest.

How does margin lending work?

The amount you can borrow is based on your financial position as well as the allowable Loan to Value Ratio (LVR) of your existing portfolio, being your shares, managed funds or cash used as security. The LVR is the amount of your loan divided by the value of the shares or managed funds being used as security.

If the value of your security drops in relation to the loan amount, you may exceed the maximum LVR. This will trigger a ‘margin call’ and you’ll be required to either reduce your loan amount, contribute additional security or sell part of your investment until your LVR is below the maximum.

For this reason, you need to pay close attention to the value of your investments if you have a margin loan so you can take action if you are in a margin call situation. It’s important to know that the security you use against the loan can be used by the lender to repay the loan.

What are the benefits of margin lending?

A benefit of margin lending is the opportunity it provides to increase your investment exposure. Essentially, borrowing allows you access to more funds, giving you the potential to make additional investments you may not have been able to make otherwise. This can magnify market exposures with the potential to increase returns or allow new purchases to diversify your existing portfolio.

Margin lending can also have tax benefits. For example, you may be able to claim the interest on your loan as a tax deduction.

What are the risks of margin lending?

There is additional risk in borrowing to invest. If the market or your investments drop in value, then you won’t only be dealing with that loss - you’ll also have to repay the loan.

Although the additional market exposure has the potential to magnify returns, it also has the potential to magnify losses. In addition to this, any positive returns need to outperform the cost of borrowing, which can fluctuate with interest rates.

Changes to tax laws may have an impact on the effectiveness of your investment strategy.

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Things you should know

Applications for Margin Loans are subject to approval. Fees and charges apply.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.

Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance.

© Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.  CommSec is a Market Participant of ASX Limited and Cboe Australia Pty Limited (formerly CHI-X Australia Pty Limited), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited.