A Margin Loan is an investment loan secured against existing cash, shares or managed funds. With more money available to invest, your potential to earn greater returns and larger dividends is increased. It is important to note that while a margin loan may increase your potential returns, it may also increase your losses.
Take a look at the following example to see the potential of Margin Loans.
| Existing Equity |
Margin Loan (50% Loan to Value Ratio) | Margin Loan (75% Loan to Value Ratio) | |
| Initial Equity | $50,000 | $50,000 | $50,000 |
| Debt | $50,000 | $150,000 | |
| Portfolio | $50,000 | $100,000 | $200,000 |
| Portfolio Growth | 20% | 20% | 20% |
| Portfolio Value | $60,000 | $120,000 | $240,000 |
| Dividends (5%) | $3,000 | $6,000 | $12,000 |
| Interest (8%) | -$0 | -$4,000 | -$12,000 |
| Equity After 1 Year | $63,000 | $72,000 | $120,000 |
| Return on Equity | 26.00% | 44.00% | 80.00% |
This example assumes a 1 years investment timeframe, 20% growth, 5% dividend yield paid at the end of the year and an interest rate of 8%. These assumptions may not be indicative of actual market rates or timing. This example does not take into account tax implications or your personal situation. We recommend you speak to your financial and/or tax adviser about how a margin loan may affect your financial position.
Because a margin loan facility uses debt to supplement your equity contributions, any movement in the value of your portfolio is magnified. In a rising market, this will mean larger gains however in a falling market your losses will also be larger. Click here to read more about some of the risks of margin lending.