"I want to reach my financial goals sooner."
It often feels like it will take forever to reach your financial goals. But if you already use your savings to invest in say, managed funds, you can speed up the process and reach your goals sooner by adding additional borrowed funds to the amount you already invest. This is known as margin lending.
How does a Margin Loan work?
A Margin Loan lets you borrow to invest in listed securities or managed funds using existing cash, shares or managed funds as security. It's a simple and flexible way of increasing the size and diversification of your investment portfolio.
Interest paid may be tax deductible
Prepaying interest on your margin loan before the end of the financial year can help you manage your cash-flow, by locking in an interest rate up to 12 months in advance. The interest paid may also be tax deductible (subject to capital protected borrowing rates).
Reduce capital gains tax
You can increase the size of your investment without having to sell your existing portfolio, and triggering a capital gains tax disposal.
Easier to diversify
Borrowing money gives you more money to invest, which means you can diversify your investments, potentially reducing risk without sacrificing long-term performance.
You can generally borrow between 30 – 75% (a Loan to Value Ratio [LVR] is allocated to each acceptable security available for margin lending) of the market value of a security, although gearing at lower levels may reduce your risk of a margin call.
Whilst gearing can magnify your gains, it can also magnify your losses, so you should speak to a financial adviser to find out the right strategy for you.
Case study: Fast track to success
When career woman Megan Raines (not her real name) set her sights on buying a new home, she turned to a strategy of regular gearing to fast-track her goal.
For many investors one of the key stumbling blocks in the quest for financial security is the time it can take to achieve our goals. For Megan Raines (35), the goal of buying a first home seemed elusive. “I had a good savings plan in place but property market values were growing faster than my deposit – it was incredibly frustrating.” It wasn't until Megan consulted with her BT financial adviser that she discovered a straightforward solution to her dilemma. She recalls, “My adviser recommended a strategy of regular gearing to speed up the savings process. I wasn't convinced at first but when he explained I could reach my savings target four years earlier I quickly warmed to the idea.”
The power of additional funds
Regular gearing is a process that combines an ongoing investment plan with additional borrowed funds taken as a margin loan.
In Megan's situation, the aspiring home buyer needed a deposit of $210,000 to purchase a property in her preferred suburb. At the time of consulting with her BT adviser – back in April 2001, Megan had accumulated funds of $20,000 and was adding a further $1,000 each month to her savings pool. As Megan's adviser explained, she could invest the $20,000 directly into shares and/or managed funds and continue adding $1,000 to her portfolio every month. Alternatively, Megan could fast track her savings with a margin loan. This would let her add $20,000 of borrowed funds to her existing investment as well as adding an extra $1,000 each month, bringing her total monthly savings to $2,000.
Megan says, “I'm a fairly conservative investor, but I could see there were real advantages to the strategy of regular gearing, which would get me into my own home sooner.” She adds, “My adviser explained that I could claim a tax deduction for the interest paid on the margin loan. And by investing more I would receive additional dividend income and franking credits to further boost my savings.
As an added sweetener, Megan was able to prepay the interest on her loan each year, providing more control of her tax position and locking in a competitive interest rate.
Benefitting from dollar cost averaging
The process of regular investing also meant Megan was benefiting from dollar cost averaging – buying more shares and fund units when the market dipped, and buying fewer assets when the market recovered and values were higher. This way Megan didn't have to worry about timing the market as any highs and lows were automatically smoothed out.
It's a strategy that has certainly paid off for Megan. By March 2011, with the help of her margin loan, she had reached her target savings of $210,000, and was able to put a healthy deposit on an apartment in Sydney's beachside suburb of Narrabeen. Without the benefit of her gearing strategy she would still be four years away from her goal.
“My margin loan, combined with regular gearing, let me turn the tables on the property market” notes Megan. “Now that I've achieved my goal of home ownership, I plan to continue with regular gearing to fast track an investment portfolio.”
To find out more
Talk to a margin lending specialist.
Ask your financial adviser how a BT Margin Loan can make borrowing to invest work for you, or call 1800 816 222 8am to 6.30pm (EST), Monday to Friday.
Find financial advice on investing with a margin loan?
Need a financial adviser or just want to talk through your options? At BT we can give you general and limited advice on how to invest. Or we can help you find a registered financial adviser who can help you with personalized financial advice. Just call us on 1800 104 800 to discover how.
Things you should know
Assumptions: Initial client equity $20,000 and initial margin loan of $20,000 – i.e. gearing level of 50%. Taxable income at marginal tax rate of 31.5%. Interest rate of 9.50% p.a. not capitalised to the loan. Dividends reinvested. Capital growth of 5% p.a. Income growth of 5% p.a. Net investment value after tax, loan and interest costs. Dividends franked at 50%. Note that there is no guarantee that these assumptions will prove correct, and any changes to the assumptions will result in a different outcomeConsider your personal objectives, financial situation and needs before acting on the information. Past returns are no guarantee of future performance
All figures based on retirement at age 65, 9% employer contributions, earnings of 6% per year, net of fees and taxes in today's dollars. All other fees and charges ignored except contributions tax of 15%. $30 post tax contribution (top up) per week equals $1560 per year, and attracts government co-contribution. You should consider your personal objectives, financial situation and needs before acting on this information. Past returns are no guarantee of future performance. BT Securities Limited ABN 84 000 720 114, AFSL 233722 and Westpac Banking Corporation are together the issuers of the BT Margin Lending Margin Loan. Product Disclosure Statements (PDS) are available for each of this product and can be obtained by visiting www.westpac.com.au. You should consider the PDS before making a decision in relation to any of the products referred to in this article. The application of taxation laws depends upon an investor's individual circumstances. You should therefore seek professional advice on the taxation implication of investing through the products referred to in this advertisement and should not rely on this information which should be used as a guide only.