There are many ways to use margin loans to enhance investment opportunities and build wealth.
Margin loans can offer flexible financing options to investors by allowing them to grow an investment portfolio, or to use an existing investment portfolio as security for business or investment purposes. Outlined below are three different potential approaches to using a margin loan, tailored for an Australian audience.
You can increase your investment exposure by borrowing to invest beyond your cash contribution, which may amplify potential returns (and potential losses, too).
For example, with $20,000 cash, you could borrow $20,000 and invest a total of $40,000 into an ASX listed ETF tracking the S&P/ASX 200. This would provide a starting gearing level of 50%. Assuming an annual 10% increase in the capital price, the investment value will increase to $44,000. This generates a $4,000 gain (return on capital contribution of 20% p.a.) in comparison to a $2,000 gain without leverage (return on capital contribution of 10% p.a.).
However, a 10% decrease in capital price to $36,000 creates a $4,000 loss (return on capital contribution of -20% p.a.) in comparison to a$2,000 loss without leverage (return on capital contribution of -10% p.a.). Additionally, it is important to consider any CGT events, dividends received, potential franking credits and loan interest as these factors may impact on the total annual return of the geared investment portfolio.
You should also be aware of the risk of a margin call. For example, if an ETF tracking the S&P/ASX200 is required to maintain a 75% Loan to Value Ratio (LVR),and the portfolio value fell to $25,000, the margin loan amount would be capped at $18,750 ($25,000 x 75% LVR) This would trigger a margin call, requiring the investor to either contribute $1,250, add additional securities to the portfolio, or sell some shares to repay part of the loan. This can happen at any time during the investment.
In addition to increasing your share market exposure, a margin loan can offer a flexible line of credit to fund business or investment use cases without needing to sell existing assets. For example, if you are undertaking a major renovation on commercial property and the builder has advised you of a major cost blowout. Assuming you haven’t got sufficient funds to complete the project, you could sell down your $100,000 ASX share portfolio to fund this expense, however this could trigger a capital gains event, and ideally you may want to keep your shares invested. Instead, you could borrow up to $70,000 against the existing share portfolio (for a 70% LVR), complete the renovation and keep your shares. This option can provide a quick and efficient source of credit. Investors who want to reduce the risk of a margin call can choose to borrow more conservatively. Note that variable interest rates on margin loan rates can change and you need to ensure you have enough capacity to deal with any rate rises.
You may be able to pre-pay your margin loan’s annual interest, which may qualify as a tax deduction if the loan is used to fund income-producing investments. For example, if you lock in a 1-year fixed rate at 7% on a $100,000 loan, this means you will owe $7,000 in interest during the next financial year (2025-2026). If you elect to pay the entire $7,000 by 30 June 2025, you may be able to claim this amount in your 2025 tax return, potentially reducing your taxable income in the current financial year (2024-2025) based on your marginal tax rate.
Leverage generally magnifies gains or losses based on market trends. Margin calls arise if valuations drop below LVR thresholds, requiring action by the investor, particularly during periods of stock market volatility. Lending rates impact the cost of the loan over time.
The taxation implications arising from a margin loan will vary according to the investor’s particular circumstances. As such, the above illustrations should only be used as a guide and do not constitute taxation advice. Investors should seek their own personal tax advice in relation to the impacts of entering into a margin loan arrangement.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB does not guarantee the accuracy or reliability of any information in this article which is stated or provided by a third party. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You may be exposed to investment risk, including loss of income and principal invested.
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