How much can you borrow?

Not all shares and managed funds are alike.

All sectors and industries (such as industrial, media, property, resources and mining) have different risk profiles. Because of this, margin loan providers specify a lending ratio for each investment that they are prepared to lend against.

The loan provider sets the lending ratio of every eligible investment, which sets the size of the buffer. For example, BT Margin Lending sets lending ratios on individual securities that vary from 30% to 75% with a buffer of 10%. Lending ratios can change at any time without notice.

A diversified portfolio presents a lower security risk for the lender than a portfolio that is dominated by a single stock.

If you are only planning to hold a few stocks within your portfolio, be aware of the implications for your loan obligations if your portfolio becomes classified as a single stock portfolio. For most single stock portfolios with an LVR lower than 60%, a loan provider will reduce the margin loan that can be raised.

Your lending ratio can change according to fluctuations in the market. The lending ratios apply to the value of your investment. As that value goes up or down, your loan limit rises or falls as the lending ratio is applied to the new portfolio value.

For example, if your investment increases in value, this lifts your loan limit and makes additional funds available to use. If your investment decreases in value, your loan limit will decrease and may result in a margin call.

If you wanted to invest $10,000 in a managed fund that was assigned a lending ratio of 70%, the amount BT would lend you would be $7,000. You would then be required to find the remaining $3,000.

If the market value of your investment goes up and your lending ratio goes up to 80%, you could borrow $8,000.