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What is margin lending?Why use margin lending?What are the risks?
What is margin lending?
Borrowing to invest, or gearing, has long been a popular wealth creation strategy. By enabling you to invest more money, gearing has the potential to improve your investment returns and help you reach your financial goals sooner.
A margin loan from NAB Margin Lending is a flexible investment loan that can be used for investment purposes such as investing in shares and managed funds. You simply provide existing approved shares, managed funds or cash as security for the loan. You can then use the borrowed money to access a greater range of investment opportunities, because you are not limited to investing your own capital.
Like other investment strategies, margin lending involves an element of risk. Just as there is potential for growth, there is also potential for loss. We recommend you talk to your financial or tax adviser to determine if using a margin lending strategy is right for your particular circumstances.
Two main gearing options to consider
Lump sum gearing - case study
Instalment gearing - case study
Some of the key benefits of gearing using margin lending include:
You can start small
Unlike investing in residential property, you don't need to borrow large sums of money to start (or build on) your investment portfolio.
Diversification opportunities
Diversification is a sound strategy for reducing investment risk. By having more to invest, you can potentially diversify your portfolio and spread your exposure across a wider variety of investments.
Liquidity
If you need access to your funds, you can generally sell your assets to assist you in managing your cash flow requirements should you require funds for other purposes.
Gearing and tax implications
Using margin lending to gear your investments may generally have the following tax consequences:
| Tax implications |
Explanation |
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Tax implications
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The interest you pay on a margin loan may be able to be claimed as a tax deduction. Furthermore, if the interest (and other tax deductible costs) exceed the income from your investments (including franking credits), you may be able to offset these costs against other sources of assessable income. |
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Tax deductible interest
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For a fixed rate loan, you have the ability to pre-pay interest on your margin loan for up to 12 months. This allows you to bring forward an expense that may otherwise be tax deductible in the following financial year. This additional tax deduction may then be used to reduce your taxable income in the current financial year. It is important to note that this may be subject to the special pre-payment rules and you should seek professional tax advice. |
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Tax implications of interest payments
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By borrowing against existing assets, you may be able to take advantage of other investment opportunities without triggering a Capital Gains Tax (CGT) liability. This is because you don't need to sell your existing investments to use them as security for your margin loan.
You may then be able to sell your existing (and your geared) investments at a time when your marginal tax rate is lower (e.g. in retirement). This can potentially help you to reduce or eliminate the CGT payable.
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Capital Gains Tax
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If you invest the borrowed money in Australian shares and certain New Zealand shares, directly or via a managed fund, you may be entitled to valuable franking credits. Depending on your personal circumstances and subject to the 45 day holding period rule, these credits may be able to be used to offset some (or all) of the tax payable on the dividends or distributions. |
Increased investment opportunities
Margin lending can help to build your wealth and increase your investment opportunities more quickly than if you rely on your own investment capital, with a larger portfolio potentially increasing your long-term investment returns.
What are the risks?
While a margin loan can increase your gains in a rising market, it can also magnify your losses when the market declines. Consequently, you should consider investing in a diversified portfolio of quality assets and ensure you have enough time (and discipline) to ride out the inevitable investment market fluctuations.
The table below highlights some of the risks involved in gearing and how you could potentially manage each of these:
| Risk |
How you could manage |
| Going into margin call |
- Gear conservatively
- Diversify your investments
- Frequently monitor your investments and loan balance
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The security ratio assigned to an asset may change over time
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By gearing conservatively, you can potentially reduce the possibility that a reduction in the security ratio could result in a margin call. |
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Rising interest rates
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You should ensure that you have enough surplus cash flow to absorb interest payments. You could consider fixing the interest rate on some (or all) of your margin loan to offer protection.
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| Falling investment income |
You should think about ensuring that you have enough surplus cash flow to cover any income shortfall. |
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Loss of salary due to illness
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You should consider if you have enough income protection and life insurance. |
For any queries contact NAB Margin Lending on 1300 135 145 (8.30am - 5.30pm EST, Monday to Friday) or email margin.lending@nab.com.au
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