Margin lending (Gearing)
It lets clients borrow to invest in a portfolio of shares and managed funds, so you can use the power of gearing to increase their returns. It is important to remember that gearing can also increase your clients’ losses.
Margin Lending is a line of credit that gives clients:
- client borrows 35-85% of the value of the shares and managed funds
- they contribute their own capital for the balance
- they invest the total amount in shares and managed funds from the approved list
- the portfolio is the security for the loan (or they can use an existing portfolio held by a third party)
- client can write call options against their shares.
the potential to build wealth faster than if they only used their own funds to invest
a choice of more than 3,000 Australian shares and managed funds
the ability to invest in a portfolio recommended by GuardianFP
the ability to use their existing portfolio as security or to start a new portfolio
the ability to use shares as security for their loan and as option trading collateral
the potential for tax efficiency.
How does Margin Lending works
It works like this:
Case Study
Martin wanted to build more wealth before he retired, and chose to invest $50,000 of his own capital and borrow $50,000 through a Margin Loan, investing the full amount in Woolworths shares.
Over the five years of the loan (30/6/98 to 30/6/2003), Martin’s Woolworth shares grew from $5.25 to $12.52, and he receives dividends of $1.28 per share. Historical interest rates have been estimated to be 8.58% p.a.
The table below shows how Martin’s Margin Loan helps him build more wealth, compared with an investment without a margin loan.
The facts
| Without margin loan | With margin loan | |
| Martin’s own capital | $50,000 | $50,000 |
| Loan amount | Nil | $50,000 |
| Total investment | $50,000 | $100,000 |
| Dividends | $12,190 | $24,381 |
| Borrowing costs | Nil | $19,125 |
| Market value of shares at the end of the loan (before sale) | $119,238 | $238,476 |
| Capital gains tax if shares are sold | $20,867 | $41,733 |
| Net value of shares after capital gains tax and repayment of any loan | $98,371 | $196,473 |
The result
The gross borrowing costs have been covered by dividends received.
At the end of five years Martin may choose to sell his shares, incur capital gains tax and repay the loan. Alternatively he could repay the loan from other funds and continue to earn dividends on his $238,476 portfolio.
Note: Martin is on the highest MTR.
