Why borrow to invest?

Why invest in equity markets vs property?

The property market has delivered impressive returns in the last few years, and plenty of investors have chosen to put their dollars into housing. But there’s a good deal of upside to consider in choosing equity markets over property. It’s more cost effective to buy and hold shares compared to property, and it’s relatively simple to offload them if you need to sell.

Benefits of a margin loan

Potential to amplify your returns
The main benefit of a margin loan is it can increase your returns. With access to more funds, an investor can buy more shares, meaning they can earn more income via dividends and capital growth. A margin loan also gives you the ability to diversify your investment portfolio by buying across more sectors, countries, and asset classes.

Unlock the equity in your existing assets
Say you want to buy some shares in an upcoming IPO, but you don’t have enough cash on hand to do so. Ordinarily, you might sell some of your existing share investments to generate enough cash to finance the new investment. But with a margin loan, you can unlock the equity in your existing assets without having to sell them (and without potentially triggering a capital gains tax event).

Flexibility
There’s no obligation to draw down on a margin loan – if you don’t use it, you won’t need to make repayments or pay interest charges. In this way, it’s almost like a line of credit rather than a loan.

If you do use the loan, you’ll be charged interest. However, there’s some flexibility in the way you pay interest. You can choose to fix your interest rate or leave the loan on a variable rate. On a fixed rate, you have the option to pay your interest in advance, or to pay it monthly in arrears.

Tax deductions
Interest paid on a margin loan is often tax deductible. You might be able to pay interest before the end of the financial year to bring the tax deductions forward.

Risks of a margin loan

•   As well as amplifying your returns, a margin loan can also amplify your losses if your investments perform poorly.

•   If the value of your portfolio falls too much relative to your loan value, you will receive a margin call. To resolve a margin call, you’ll need to top up your loan with cash or sell some of your investments on short notice.

•   If your margin loan is on a variable rate and there is an interest rate increase, the cost of running your loan will go up.

•   Make sure you understand the risks before you use a margin loan, and familiarise yourself with the ways to manage margin loan risks.