Margin loans

The highs and lows of margin loans

A margin loan lets you borrow money to invest and uses your shares or managed funds as security. It can help you increase your returns but it can also magnify your losses.

Margin loans are for dedicated investors who actively monitor and manage their investments. Many people have suffered financial ruin when margin loans have gone sour. If you don't fully understand how margin loans work and the risks involved, don't take out a margin loan.

How margin loans work

Let's take shares as an example. When you borrow money to buy shares, the lender takes as security the shares you buy with the loan. This means the lender can sell the shares to repay the loan.

Because share prices move frequently, you are exposed to the risk that the shares might fall in value. To gauge the risk of your loan, lenders use a Loan to Value Ratio (LVR). The LVR is the amount of your loan divided by the total value of your shares. Most lenders require you to keep the LVR below a maximum of 70%.

Example of a Loan to Value Ratio

Jane has $10,000 invested in shares and borrows another $5,000 to invest using a margin loan. This gives her a total share portfolio worth $15,000. Because Jane's loan represents 33% of the value of her portfolio, she has a Loan to Value Ratio of 33%.

If the value of your investments falls to a point where your loan exceeds the maximum LVR, you will be required to top up your investment or repay some of the loan. This is known as a 'margin call'.

In order to meet a margin call and bring the LVR back to an acceptable level, you will have to do one of these things:

  • Find extra cash to pay the lender
  • Sell part of your investment to raise cash
  • Give the lender additional security (e.g. security over other shares)

The risks of margin loans

Margin loans are very risky. You may:

  • Face huge losses if the market falls
  • Be forced to sell part of your investment at a low price to meet a margin call
  • Get an unexpected margin call if your lender decides to lower the maximum LVR for one of your investments
  • Not always be contacted by your lender when a margin call is made*

In extreme circumstances you could also:

  • Owe more than your original investment was worth
  • Lose your home if you borrow against it for the investment
  • Be forced to pay off your loan at short notice if your lender decides the investment is no longer suitable as security

*As of 1 January 2011, new credit laws require lenders to contact investors when making a margin call. Read about the new margin lending requirements.

Case study: Nick's fortune dives

Unhappy man after losing money on his margin loanNick took out a margin loan to invest in shares when the market was up and earned himself some decent money. But when the market turned sour during the 2008 global financial crisis, his lender started making margin calls almost every day.

Nick did not have any money to pay his lender - all his cash was tied up in his investments. He had put up his apartment as security for the loan and was in danger of losing it if he did not make a substantial repayment to his lender. To avoid this, Nick was forced to sell most of his investments at low prices. The sale prices were so low that he was still left with a substantial debt. With the stock market recovering slowly, he is not making as much money as he used to - but his debt continues to grow.

Tips for managing margin loan risks

Borrow conservatively

The first rule of margin loans is to borrow conservatively. This means you should borrow much less than the maximum amount the lender offers you and never mortgage your home to invest in a margin loan.

Smart tip

Borrow conservatively and never mortgage your home to invest in a margin loan. 

As a starting point, consider borrowing less than half of what the lender will give you. This is the best way to protect your investment. The more you borrow, the more you will lose if the market falls. Conservative borrowing also reduces the risk of being forced to sell part of your investment when prices are at their lowest.


You should also diversify your investment. Choose a diversified managed fund or a diversified portfolio of shares. Spread your investments in different industries and/or markets. It would be less likely for all areas to fall at the same time, so diversifying your investments better protects them. Read more about diversification.

Pay the interest

Paying the interest on your loan keeps your debt under control. Most margin loans do not force you to make regular repayments; the interest can just be added to the loan (known as 'interest capitalisation'). Making regular repayments can prevent your debt from increasing each month.

Check your Loan to Value Ratio regularly

Check your loan account regularly because the value of your investment can change very quickly. As your investment is used to secure the loan, you should ensure that you can sell the investment and repay the loan, if market circumstances change.

Have cash or security ready for margin calls

If your lender makes a margin call, you will have to respond very quickly, usually within 24 hours or less. The responsibility falls on you to increase the assets securing the loan or reduce the loan by the time set out in your margin loan agreement.

Shop around for the best loan

Margin loan interest rates and features vary so shop around for a lender that best suits you. Start by searching online at the websites of providers to compare different margin loans.

A margin loan can be great when times are good but if the market falls, you could be left out in the cold with a huge loan to pay. Think very carefully before taking out a margin loan.

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Last updated: 04 Oct 2017