Margin loans are designed specifically to fund investment in eligible shares and managed funds. The loan amount is secured against the underlying investments, typically to the value of between 30 and 70 per cent of the investment, and is subject to a margin call should the value of your security drop.
Margin loans are most commonly used when you do not want to use your residential property as security, or when you don’t have enough equity in your property to service an additional investment debt but do have the cash flow required.
Be aware that unlike property, which has a specific loan term, margin loans are subject to call should the value of your portfolio fall outside the prescribed ratio.
Margin lending can be quite complex, so seek the advice of a good financial planner and accountant before using this investment strategy.
Types of margin loans
Margin loans are available in most of the options you will find for residential investment loans, however there are three main types more commonly available:
- Variable Rate (similar in operation to a Line of credit facility).
- Fixed Rate – Interest only
- Fixed Rate – Interest in advance
What is a margin call?
Your lender will typically issue a margin call when the value of the investments securing your loan falls below an agreed value. This protects the lender from backing debt that cannot be repaid by the sale of the asset securing that debt.
When a margin call is issued, your lender will require you to increase the level of assets securing your loan. You can do this by:
- finding extra cash to pay the lender
- selling part of your underlying portfolio to raise cash
- giving the lender additional security
It’s important to note the lender is under no obligation to inform you of a margin call, so you must constantly monitor your accounts to ensure you remain compliant with the terms of your loan agreement.