Investment lending is a powerful tool for diversifying assets
What is Margin Lending?
A Margin Loan is a facility that allows you to borrow money which you use, in addition to your own money, to invest in various acceptable investments including:
- Listed securities such as shares and exchange traded funds
- Managed funds
- Cash deposits and other assets
In the right hands, investment lending is a powerful tool for diversifying your assets and accelerating wealth creation. The faster you go, however, the greater the risk. That's why Ord Minnett offers a total Margin Lending strategy, advising you on how much to gear, when to gear and what to invest in.
Margin Lending Features
Discover the benefits of margin lending
Increase the amount you have available to invest
Borrowing to acquire an asset is called gearing or leverage. The net return on an investment includes growth in its value plus distributions less transaction costs and taxes. If, over your planned investment horizon, the net return on your investment exceeds your borrowing costs then by borrowing to invest you will generally earn a higher after-tax return than if you had invested without borrowing.
Diversify an existing portfolio without selling
You may be able to borrow against a portfolio of Acceptable Investments that you already own. You can then use the borrowed money to acquire other investments without selling your existing portfolio. These investments may be in a different range of asset classes, industries and companies. Investing in a range of different assets is called diversification and it is a financial technique that may reduce the risks associated with investing.
Manage your investments with the help of a flexible facility
There is no set date to repay the money you borrow although events may occur that result in your loan becoming due for payment in a very short period. The Ords Margin Loan Facility has a number of flexible features which your Adviser can discuss with you.
While margin lending gives the potential for investors to magnify their gains in a rising share market, any form of borrowing to invest risks the potential of magnifying losses. When borrowing via a margin loan to invest in shares or managed funds, this risk is greater due to the highly liquid nature of the investment.
Some potential risks of margin lending include:
- Risk of a margin call due to share market volatility: Shares are the most volatile out of the four main asset classes, rising and falling every day. If your shares were to suddenly lose value and you had a margin loan on those shares, you could expect a margin call.
- Risk of having to crystallise losses by being forced to sell into a falling market: Having a margin loan means that you are not as easily able to ride out periods of downturn. This is because when the value of your portfolio dropped and has brought your LVR above the lenders maximum LVR and buffer, you will receive a margin call. If you do not have the cash to meet the margin call, you may be forced into selling your shares at possibly the lowest point of the downturn.
- Potential to magnify losses: In the same way as a loan has the potential to magnify your gain in a rising share market, a loan also has the potential to magnify your losses in a falling share market.
- Risk of Loan-to-Value Ratio (LVR) changes imposed by the lender: Lenders can adjust their acceptable maximum LVR which can put you at further risk of a margin call.
- Risk of interest rate rises affecting the ability of the borrower to service the debt: If you have a variable rate on your margin loan, an interest rate rise will mean there is more interest to pay on your debt.
Margin Lending is more complex than a traditional loan and carries a higher level of risk, so it's suitable for dedicated investors who actively monitor and manage their investments.
"Through prudent investment advice and market analysis, Ord Minnett has been building the wealth of investors for generations."
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