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Margin lending
Fiddling at the margins
Karin Derkley - May 2007
Australians are happy enough to mortgage themselves to the hilt to buy residential property, thinking nothing of borrowing against the equity in their homes for a deposit to buy an investment property. But when it comes to borrowing to invest in the sharemarket, it seems we’re a lot less keen to go into debt.
According to RBA figures around 162,000 margin lending accounts were held by around 120,000 investors in December 2006. That may seem an impressive enough figure and is in fact double the number of accounts held in 2000. But it represents just 1% of the 10 million Australians who own direct shares, and the $27 billion they borrowed through margin lending facilities is just 3.5% of the $800 billion worth of shares owned by Australian investors. (By comparison, by end last year Australian residential property investors were in debt to the tune of $195 billion.)
To John Daley, the head of margin lending at ANZ, that leaves an awful lot of unleveraged shares out there in the market. Daley is understandably only too keen to see those numbers swell, but he concedes that margin lenders are up against one or two obstacles. For one thing, Australians might be notoriously enthusiastic to borrow to pay for cars and overseas trips, but they’re nervous about borrowing to buy shares. “People are told by their parents that debt is bad and that they should become debt-free as soon as possible,” he says, “but they don’t understand that there is a difference between borrowing to consume and borrowing to invest.”
When Australians do borrow to invest they’re more comfortable borrowing to own things they drive past and show off to their mates, and, post the excitement of the tech-bubble, shares in a company don’t quite cut it. It doesn’t help that daily market reports give the appearance that shares are volatile and risky to borrow against, even though over the long term Australian shares have roughly the same level of return as residential property – both around 12%. Shares generally deliver a higher yield than property, require no maintenance or dealing with tenants. And you can add to your shareholdings in small parcels, rather than stumping up several thousand dollars at once.
You don’t have to be a big-time investor to use margin lending, Daley points out. In fact if you’ve got just a few thousand dollars to invest it makes more sense to borrow to diversify across a number of shares rather than buying just a couple. Many investors worry about margin calls, but you don’t have to gear yourself to the maximum loan to value ratio allowed (generally 70%). A 50% gearing level will double the funds you have exposed to the market, and give you the tax benefits associated with negative gearing, while keeping your borrowings within the safe zone should the market take an unexpected dive.
You can even capitalise the interest, adding it to the loan amount rather than paying it off each month. If you get a return of at least 9% a year, including 4% reinvested dividends, you’ll actually keep the loan at that safe 50% level. (If you pay off the interest and the shares keep growing in value, your gearing level will soon start to shrink.)
In a way the biggest problem for margin lenders like Daley may be that margin lending to buy shares is all too safe and boring. Borrowing dollar for dollar to buy a diverse portfolio of quality shares to hold for the long term is just not as exciting as borrowing 90% or more against a property that might double its value in the next couple of years, but might just as likely sit flat for the next five, while your tenants trash the place, the hot water system blows up and you shell out for rates and insurance. Now there’s a story you can tell your mates.
Whatever your views, you can discuss this article - or any of Karin's articles - on our message board Your 2 Cents.
Karin Derkley is the former deputy editor of Personal Investor magazine, and continues to write for The Age and AFR Smart Investor. She is author of “Buying & Selling Your Home for Dummies,” published by Wiley Australia.
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