|
|
|
|
|
 THE ABC OF... |
The ABC of...margin lending
Choosing a Margin Lender
CS journalists
Most financial institutions offer margin lending, which has its good and bad points. The good news is you have loads of products to choose from. The bad news is that too many choices can sometimes result in shopper paralysis; it's easy to get so overwhelmed by choices that you can't bring yourself to make a decision at all.
This is doubly difficult when we step into the margin-lending department, and find ourselves swamped by tricky finance-speak. Should I choose a fixed or variable rate on my margin loan? What sort of LVR is appropriate? What about the buffer margin? Thankfully comparison is our job, so take a deep breath and let's get comparing.
A. Interest Rates
Interest rates on margin loans are usually a touch above the home loan rate, but below personal loans and credit cards. So whatever you do, don't even think about using a personal loan or credit card to buy shares.
Interest rates on margin loans are usually a touch above the home loan rate, but below personal loans and credit cards. So whatever you do, don't even think about using a personal loan or credit card to buy shares.
Fixed Rate Loans
Fixed rate loans can be a good choice if interest rates are steadily rising. By locking in a fixed rate for a period of time - the periods range from three to 36 months - you won't be slugged by any rate rises over that period. If you are the type of person who gets nervous every time the Reserve Bank of Australia sits down for their monthly board meeting, then this might be a sensible choice. Just remember that taking out a fixed rate loan excludes you from any savings that a rate decline over that period will deliver.
Another good reason for choosing a fixed rate margin loan is if you intend to pre-pay 12 months interest in advance before the end of the tax year, 30 June. Why would you do that? Some investors bring forward the year's interest payments on their loan - and pay it upfront - so they can fully claim the interest as a tax deduction on their upcoming tax return, in July, rather than waiting until the following year. For this reason, margin lenders are particularly active around tax season, so it's worth remembering to check out the deals.
The biggest downside to fixed rate margin loans is that they are less flexible than variable rate loans. Some hit you with penalty fees for paying out the loan early, or have restrictions on your repayments.
Variable rate margin loans
The majority of investors choose variable rate margin loans. Since it's pretty well impossible to predict the future course of interest rates, most say 'what the heck' and stick with a variable rate since they are generally more flexible than fixed rate loans.
B. Loan to Value Ratio (LVR)
Loan to value ratios (LVRs) on shares and managed funds sound scary but they're not. Just think of this ratio as the amount the lender is willing to cough up. So if the LVR is 70 per cent, then the lender is willing to lend you 70 per cent of the total cost of the share or fund. This means that you must fund the remaining 30 per cent.
Each lender will have an approved list of shares and managed funds with their own special LVRs, which can be downloaded from their website. It's important to make sure that the broker you intend to sign up with has your favourite shares or managed funds on its approved list.
On speculative stocks, LVRs can vary as much as 20 per cent between lenders. LVRs on blue chips stocks such as the big banks and miners, however, are fairly uniform, with at a maximum of around 70 per cent.
C. The buffer margin
The buffer margin is another funky term that simply refers to how fast a lender will be knocking on your door if your investment starts to sag. Higher buffer margins give you more leeway if your shares or managed funds take a hit. Lower buffer margins increase the chance that you'll face a margin call quickly. See our story on the Risks of margin lending.
Technically speaking, the buffer margin is the percentage by which your LVR can be exceeded before you enter margin call territory. Buffer margins on shares and managed funds range from 5 to 10 per cent. Of course, the risk of getting a margin call can be reduced by having a lower LVR.
D. Instalment Gearing (OK, so it should be called "the ABCD of Margin Lending")
Instalment gearing is a terrific way for beginner investors to combine a regular savings plan with margin lending to get ahead. Since it involves borrowing money bit-by-bit (usually monthly) rather than all at once, it can be a less harrowing way to start a margin lending strategy. Basically, instalment gearing involves contributing some savings plus some borrowed money and investing this money in shares or managed funds in instalments.
 Email to a friend
 Print this article
|
|
