Quick answer
A margin loan lets you borrow to invest in shares or funds, using the investments as security. If their value falls, you may face a margin call and have to add cash, add assets or sell. Margin lending is a regulated investment product that Ownright does not typically arrange, but we can look at property-secured alternatives.
Key points
- Borrowing to invest magnifies both gains and losses
- A margin call can force you to add cash or sell at a bad time
- Margin loans are secured by the investments, not by property
- Property-secured loans work very differently, with their own risks
- Suits
- Experienced investors who understand gearing
- Security
- The shares or funds bought, and sometimes others you already hold
- Ownright's role
- We do not typically arrange margin loans; we look at alternatives
- Australia-wide
- Yes
How does a margin loan work?
A margin loan lets you borrow money to invest in shares, ETFs or managed funds. The lender takes your investments as security, and typically lends only a portion of their value. You add your own money, the lender adds theirs, and the combined sum goes into the market. Gains are magnified because you own more than you paid for. Losses are magnified too, and the loan still has to be repaid.
MoneySmart describes margin loans as a high-risk strategy and notes that you can lose more than you put in. That is the single most important thing to understand before going any further.
What is a margin call?
Every margin loan has a loan to value ratio, which is the loan divided by the value of your investments. Lenders set a maximum. If markets fall, or the loan balance climbs, that ratio rises. When it crosses the limit, you receive a margin call.
You generally have a short time to respond, often about a day. The usual ways to fix it:
- Pay cash into the loan
- Add more investments as security
- Sell some holdings to reduce the loan
If you do nothing, the lender may sell your investments for you, often at the worst possible moment. Keeping spare cash and borrowing well under the maximum are common ways people reduce that risk.
What is securities lending?
Securities lending is a different thing. Rather than borrowing money against your shares, you lend shares you own to another party, typically for a fee, and they return equivalent securities later. It is mostly used in wholesale markets and by some larger investors. Because it involves counterparty risk and its own rules, it is worth getting specialist advice. The terms are sometimes mixed up with margin lending, but they are separate arrangements.
Margin loan or loan secured against property?
| Feature | Margin loan | Loan secured by property |
|---|---|---|
| Security | Shares or funds | Real estate |
| Margin calls | Yes, if values fall | No margin call, but terms and covenants apply |
| Main risk | Forced sale of investments | Property at risk if repayments are missed |
| Typical use | Buying listed investments | Wide range of uses, including investing |
| Assessment | Value of the portfolio and your finances | Property value and serviceability |
Neither is safe by default. A property-secured loan brings the discipline of a regular repayment schedule but puts a home or investment property behind the debt. Our guide on what LVR means explains the ratio that sits behind both kinds of lending.
Who should think hard before using a margin loan?
- Anyone who would struggle to cover a sudden margin call
- People relying on investment gains to meet repayments
- Retirees or those close to retirement, who have less time to recover from losses
- Anyone borrowing close to the lender’s maximum
- Borrowers who have not discussed the tax treatment with an accountant
None of this is personal advice. It is general information, and a licensed financial adviser is the right person for questions about whether gearing suits you.
How does Ownright fit in?
Ownright Custom Finance is a credit-assistance business, not an investment adviser, and margin lending is an investment product we do not typically arrange. We would rather say that plainly than muddy the water.
What we can do is look at the finance side of your plans. If you own property and want to release equity, we can explain how a home equity loan or a cash-out refinance works, and what lenders look at, including serviceability. If the money is for an investment property, that is a conversation we have often. For larger or more complex structures, a second mortgage may be on the table.
Whichever way you lean, tell us what you are planning and we will outline what is available. Trevor Scott leads the team from our Knoxfield head office and we work with clients in every state and territory.
An illustration
Illustrative scenario only. An investor holds a share portfolio and wants more exposure. One path is a margin loan, with its margin call risk. Another is to release a modest amount of equity from an existing property, which carries no margin call but ties the debt to the property. A third is to do neither and invest only from savings. A broker can describe the finance side of the first two, and an adviser can weigh whether any of them makes sense.
Mistakes to avoid
- Borrowing at the lender’s maximum, leaving no buffer
- Assuming the market will recover before a margin call arrives
- Not holding spare cash for a margin call
- Forgetting that interest is payable whether investments rise or fall
- Skipping tax and adviser input
Documents lenders commonly ask for
- Photo ID
- Statements for investments and existing loans
- Recent tax returns and income evidence
- A list of assets and debts
- Property and rates details if property is involved
Our guide on what documents you need for a loan has the full checklist.
What costs come with a margin loan?
Margin loans are priced like other credit, based on the lender and your circumstances, so there is no single figure to quote here. The main costs are interest on the borrowed amount, which accrues whatever the market does, and any fees the lender charges. Interest may be capitalised or paid regularly, depending on the product. Check the contract for how interest is charged, what the lender can do if the loan goes over its limit and how long you have to respond to a call.
What tax questions come up?
When you borrow to invest, the interest cost and the investment income can have tax consequences, and whether the arrangement is positively or negatively geared affects your cash flow. MoneySmart reminds readers to check the ATO’s current guidance, noting that negative gearing rules have been the subject of announced changes. Because tax outcomes are personal, speak with your accountant before borrowing, and keep records of the loan’s purpose.
How do margin loans interact with other borrowing?
A margin loan is a debt, and lenders for other products, such as a home loan, will usually count it. That can reduce how much you can borrow elsewhere, since serviceability tests take commitments into account. If you are planning a home purchase or a refinance, tell your broker about any margin lending early so the numbers are right from the start. Our guide on what lenders look for in documents helps you get the statements together.
Could a simple cash-out be a calmer option?
For some people, yes. If you hold equity in a property, a modest cash-out against it means a regular repayment and no day-to-day margin call, though it puts the property behind the debt. For others, using savings or reducing the size of the investment is the more comfortable path. We never suggest one route over another as personal advice, but we will describe how each works from the lending side.
Looking to raise finance against what you own
Sounds like you are exploring borrowing against assets to invest or restructure. We’re the lending experts when it comes to secured finance that fits your situation, so click the button below and see if you qualify.
How it works, step by step
- 1
Step 1
Tell us what you are trying to achieve, whether that is investing, releasing cash or restructuring debt.
- 2
Step 2
We look at what you own and owe, and whether property or other assets could be the better security.
- 3
Step 3
We explain the options and how each behaves if markets or your income change.
- 4
Step 4
You make the decision with a clear view of the trade-offs, ideally alongside your accountant or adviser.
Frequently asked questions
What is a margin loan?
A margin loan is money borrowed to invest in shares, ETFs or managed funds, with the investments usually serving as security. Because you are borrowing, gains and losses are both magnified. You must keep paying interest and repaying the loan even if the investments lose value. It is generally considered a high-risk strategy.
What is a margin call?
A margin call happens when the loan grows too large compared with the value of your investments, because markets have fallen or the loan has increased. The lender asks you to fix it, often within about a day, by paying down the loan, adding assets or selling. If you cannot, the lender may sell your holdings.
What is the difference between a margin loan and securities lending?
A margin loan is money lent to you against investments. Securities lending usually means lending shares you own to another party, often for a fee, rather than borrowing cash. They are different arrangements with different risks. Both are specialist investment products, and independent financial advice is sensible before using either.
Can Ownright arrange a margin loan?
No, margin lending is an investment product that we do not typically arrange. If your aim is to raise money for an investment, or to restructure debt, we can look at property-secured or other lending that may suit your circumstances. Whether borrowing to invest is right for you is a question for a licensed financial adviser.
Is borrowing against property to invest riskier than a margin loan?
They carry different risks. A margin loan can be called quickly if markets fall. A property-secured loan has no margin call, but the property is on the line if repayments cannot be met. Neither is risk-free. It is worth understanding both, and discussing them with an adviser and your accountant.
How does a margin loan affect my credit file?
As a credit product it can involve a credit check, and the loan may be a liability that lenders consider when you apply for other finance, including a home loan. A large margin loan can reduce what you can borrow elsewhere. Tell us about all your debts early so the picture is accurate.