What is margin lending? What is investment gearing?

Gearing investments increases the total amount you can invest, which increases your potential returns. It’s also important to remember that whilst a margin loan can increase your returns it can also magnify your losses.

How investment gearing and margin lending works

It's similar to taking out a mortgage. You use your existing cash, shares or managed funds as security for a loan. You supply the asset as security and the lender loans you the money. A lending ratio known as the loan-to-valuation ratio or LVR applies to each security, and this determines how much you can borrow.

Provided your margin loan balance remains within a set loan threshold, you are not required to make any repayments on your loan. However, if your loan balance falls below a set threshold, called a buffer, you will be required to pay back part, or all of, your loan. The request to repay part or the whole of a loan is called a margin call.

The limit to the amount you can borrow on your margin loan is set by the value of your securities. As the market fluctuates, the value of your securities may go up or down. This in turn changes the upper limit to the amount you can borrow. Because of this, the margin between your balance and your loan limit can be a powerful tool as there is no set loan limit..

Margin Loan Benefits

You may consider a margin loan if you want to build an investment portfolio quickly, or to be able to increase the amount you can invest. You may also want to multiply your return on investment, take advantage of tax concessions or increase your potential to diversify your investments.

Margin loan providers offer flexible payment arrangements that include prepayment and discounting. Provided you meet your loan conditions, you can pay as much or as little interest as you like. Unpaid interest is simply added to your loan.