Why borrow to invest?

CommSec CommSec

21 May 2018

For most investors, building a large, well-diversified portfolio can take a significant amount of time. Spotting an investment opportunity is one thing, but having access to enough cash at the right time can also be a challenge. One of the ways investors can potentially grow their portfolio faster is by borrowing to invest.

Borrowing to invest might sound risky, but the reality is many investors already do it to invest in property. If you needed to save 100% of a property’s value before you could purchase it, many of us would be saving for decades. Instead, we can take our deposit to the bank and negotiate a loan to cover the remaining amount. The bank is comfortable with loaning us this amount because it’s secured against the property.

Borrowing to invest in equities is similar in concept. A margin loan gives investors access to funds they can use to invest in equities assets, and the loan is secured against cash or the investor’s existing shares.

Find out more about how a margin loan works.

Why invest in equity markets vs property?

The property market has delivered impressive returns in the last few years, and plenty of investors have chosen to put their dollars into housing. But there’s a good deal of upside to consider in choosing equity markets over property. It’s more cost effective to buy and hold shares compared to property, and it’s relatively simple to offload them if you need to sell.

Investing in property

Investing in equities

Start-up capital required

10-20% deposit of total property value

Minimum share purchase $500 plus brokerage

Purchase transaction costs

Stamp duty, lenders mortgage insurance, conveyancing and legal fees

Brokerage is charged per trade

Ongoing costs

Mortgage repayments, home and contents insurance, council rates, strata fees

None

Investment income

Rent, capital gains

Dividends, distributions, capital gains

Diversification

Low

High (as long as you buy across different sectors)

Ability to sell quickly if needed (liquidity)

Difficult

Easy

Benefits of a margin loan

Potential to amplify your returns
The main benefit of a margin loan is it can increase your returns. With access to more funds, an investor can buy more shares, meaning they can earn more income via dividends and capital growth. A margin loan also gives you the ability to diversify your investment portfolio by buying across more sectors, countries, and asset classes.

Unlock the equity in your existing assets
Say you want to buy some shares in an upcoming IPO, but you don’t have enough cash on hand to do so. Ordinarily, you might sell some of your existing share investments to generate enough cash to finance the new investment. But with a margin loan, you can unlock the equity in your existing assets without having to sell them (and without potentially triggering a capital gains tax event).

Flexibility
There’s no obligation to draw down on a margin loan – if you don’t use it, you won’t need to make repayments or pay interest charges. In this way, it’s almost like a line of credit rather than a loan.

If you do use the loan, you’ll be charged interest. However, there’s some flexibility in the way you pay interest. You can choose to fix your interest rate or leave the loan on a variable rate. On a fixed rate, you have the option to pay your interest in advance, or to pay it monthly in arrears.

Tax deductions
Interest paid on a margin loan is often tax deductible. You might be able to pay interest before the end of the financial year to bring the tax deductions forward.

Risks of a margin loan

•   As well as amplifying your returns, a margin loan can also amplify your losses if your investments perform poorly.

•   If the value of your portfolio falls too much relative to your loan value, you will receive a margin call. To resolve a margin call, you’ll need to top up your loan with cash or sell some of your investments on short notice.

•   If your margin loan is on a variable rate and there is an interest rate increase, the cost of running your loan will go up.

•   Make sure you understand the risks before you use a margin loan, and familiarise yourself with the ways to manage margin loan risks.

 

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CommSec Margin Lending facilities are provided by the Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945 (the Bank) and administered by its wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited ABN 60 067 254 399, AFSL 238814 (CommSec), a Participant of the ASX Group and Chi-X Australia. Please obtain and consider the Product Disclosure Statements (PDS) available from commsec.com.au before making any decision about the CommSec Margin Loan. Applications for Margin Loans are subject to approval. Fees and charges apply. Only investors who fully understand the risks associated with gearing into investments should apply. 

Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non-guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and both entities are incorporated in Australia with limited liability.

This information is directed and available to and for the benefit of Australian residents only and is not a recommendation or forecast.

This information has been prepared without taking account of the objectives, needs, financial and taxation situation of any particular individual. For this reason, any individual should, before acting on the information on this site, consider the appropriateness of the information, having regards to their own objectives, needs, financial and taxation situation, and, if necessary, seek appropriate independent financial, foreign exchange and taxation advice. CommSec, and its related bodies corporate, do not accept any liability for any loss or damage arising out of the use of all or any part of this information. We believe that this information is correct as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness.

 

Disclaimer

This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

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