Margin Lending What is margin lending?
Also known as “gearing”, margin lending lets you borrow money to invest in shares, managed funds, master trusts and wraps. In fact, it allows you to have an investment portfolio up to three times larger than you would otherwise have. Just like investing in property, where the loan is secured against the property, your margin loan is secured against your shares, managed funds, master trusts and wraps. Gearing has the potential to improve your investment returns and help you reach your financial goals sooner.
Borrowing to invest with a margin loan can be a simple, tax-effective way to build wealth no matter what your stage of life. It can significantly enhance your ability to create wealth through greater participation in the share market.
You simply provide existing approved shares, managed funds or cash as security for the loan. You can then use the borrowed money to access a greater range of investment opportunities, because you are not limited to investing your own capital.
As with any investment, the risks associated with margin lending mean that it is not a suitable strategy
for every investor. It is important to understand both the risks involved and how you can manage those risks. For this reason, we recommend that you discuss your decision with our financial adviser and ensure that you are familiar with the terms and conditions of the facility. In short, while margin lending enhances your potential for bigger gains, it can also expose you to greater risk in a falling market. As a falling market may affect the value of the security on your loan, it is essential to understand the concepts of gearing ratios, buffer zones and margin calls.
Please call us to find out more information and if this may be a suitable investment strategy for you prior to making any investment decisions.
Why borrow to invest?
Gearing through margin lending allows you to:
- Increase your investment base – adding borrowed funds to your existing investments gives you a larger investment ‘footprint’ and more investment opportunities. With a larger investment base you have the potential for higher dollar returns than if you just invested your own money.
- Diversify easily – with a larger total investment you can spread your portfolio across a greater range of investments, giving more diversification.
- Unlock your equity – by borrowing against the equity in your investment, you can take advantage of other investment opportunities without having to sell any units and possibly incur Capital Gains Tax (CGT) liabilities.
- Increase the potential franking credits – by magnifying your total investment, gearing increases the potential franking credits if you invest into Australian share options that pay a portion of franked income. Franking credits reduce the tax you pay on dividends or distributions.
- Access tax deductions – while gearing’s primary objective is wealth creation, it also offers the potential to claim interest costs as a tax deduction providing you invest the borrowed funds in assets that produce an income. It is also possible to pay up to 12 months interest in advance and bring forward the tax deduction. This depends on your own personal tax situation and a taxation specialist is best placed to determine whether this is appropriate for you.
Source – Colonial First State
Savings Gearing
Savings gearing lets you take advantage of the benefits of margin lending with an initial investment, allowing you to step up your managed fund investments over time. With flexible monthly contributions, consisting of borrowed funds or borrowed funds supplemented by your own money, you can build a geared investment portfolio to maximise your investment potential. So it’s an easy way to start boosting your investments for the future.
While the maximum amount you can borrow is determined by the gearing ratio of your portfolio, you can choose the level of borrowing that suits you. One of the major benefits of savings gearing is that it allows you to benefit from dollar-cost averaging, which means taking advantage of longer-term market movements without trying to time the market yourself. One month your money may buy more units in a managed fund and the next a little less. Over time, however, the highs and lows usually even out.
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