Investment Loan

Do you have any real estate you can borrow against? An equity loan against property is usually cheaper than a margin loan and has no risk of margin call. The big risk is that if you lose all the money you've borrowed and you can't afford to meet the repayments on the loan you took out, then you might lose your house.

Alternatively - have a look at warrants. These are an alternative method of gearing into shares. I'm no expert on them, so I can't really go through the pros and cons yet. Some forms of warrants are popular with SMSFs since they provide a mechanism for leverage that doesn't break the strict SMSF borrowing rules.

Another alternative is to look at a managed fund which has internal gearing. These funds borrow money within the fund to invest in shares - they do all the risk management and loan payments within the fund itself, so you don't have to do anything other than buy or sell units.

 

There is this article I wrote a while back: http://www.invested.com.au/67/how-margin-loans-work-3106/ ... but it is very technical and is mostly about the formulas used to calculate various metrics for a margin loan. I am planning on writing a much less technical introductory article.

Margin loans are generally revolving lines of credit - meaning that so long as you keep paying the interest and keep the LVR below the maximum allowed by the margin lender, then you never really have to pay it back.

The amount you can borrow fluctuates daily since it depends on the value of your portfolio - as your portfolio increases in value, you can borrow more against it for other investments.

The trick is all about managing your loan-to-value ratio to make sure it doesn't get too high, because if it does (typically when the market is dropping), the margin lender will call you and ask you to either pay down the loan, add more security (additional shares/funds), or else sell some of your shares/funds to pay down the loan.

Because margin loans are revolving lines of credit, you don't need to pay them off (you only need to keep paying the interest), but if you did want to, you just get the loan balance down to zero (by paying in cash or by selling shares/units and using the proceeds to pay down the loan).

 

Not necessarily.

Depending on the way your trading account works, you should be able to use any margin lender you want. You need to speak to the margin lender to see if they can work with the share trading account you have, and if they can, usually what happens is that there are some forms you fill out which instructs the share trading account to settle share purchases and sales via your margin loan account.

How this actually works varies by share trading provider and margin lender.

Note that some share trading providers have their own margin loan facilities which makes it easier to use, but shop around first, some margin lenders are much more expensive than others and much less flexible. Make sure you read the fine print on margin lending loan agreements - look at who actually owns the shares purchases on margin. Often (but not always) the margin lender will own the shares "as nominee" for you, which means you get all the rights in relation to dividends and voting, but they get control in the case of margin calls etc.

 

Yup, just make sure that you can clearly differentiate between personal and investment borrowings (set up a separate loan facility or split an existing facility on your PPOR loan is one of the best ways). If they are effectively mixed, the ATO may disallow some of your deductions if there is any question as to which part is personal and which part is investment.