# Margin lending vs. traditional loan



## DionM (19 November 2007)

Why is margin lending popular?

Is it because it is cheaper than a personal loan, for when you don't have any other asset to loan against it (e.g. house equity)?

Just asking, as when I looked at it, I took a loan out against the equity in my home, as the margin lending interest rate was higher.  But I'm wondering if I've missed something in my evaluation, as margin lending seems popular?


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## Tysonboss1 (19 November 2007)

*Re: Margin lending vs traditional loan*

The smaller the risk assoiciated with the asset you are using as security the better the interest rate you will get,...

as far a banks are concerned the asset with the least risk is residential property, so any loan secured by residential property will have the best interest rate,...

so you are correct in saying your interst rate was better by using your equity as security to buy the shares rather than the shares them selves, however you now have equity in your share holdings that you could use to by more,..

you may have maxed out the equity in your property but your share portfoilo is actually not being uses to secure any loans,.... you could use (depending on which stocks you hold) up to 70% of the value of your share portfoilo to secure a margin loan for even more shares,... although the interest will be slightly higher than your property backed loan.

for instance my investment homeloans secured by my properties are about 7.69% at the moment,... but my margin loan is 8.5 and my unsecured business loan is 9.86%, people that have car loans are over 12% and credit cards can be 16%,..... 

It's all a matter of risk vs reward for the banks,.... contact your bank and the should be able to give you a list of stocks they
are willing to take as security, and also the % of each holding,... some stocks they will lend you up to 70% of there value others are as low as 40% of there value, But alot of stocks they won't accept as securtiy at all.


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## cmh888 (19 November 2007)

*Re: Margin lending vs traditional loan*



DionM said:


> Why is margin lending popular?
> 
> Is it because it is cheaper than a personal loan, for when you don't have any other asset to loan against it (e.g. house equity)?
> 
> Just asking, as when I looked at it, I took a loan out against the equity in my home, as the margin lending interest rate was higher.  But I'm wondering if I've missed something in my evaluation, as margin lending seems popular?




* You pay interest only on a margin loan (in terms of your monthly repayments). Of course you can pay back capital, but you are not obliged to in your monthly repayments.
* No set up fees, unless you are a company or business
* Margin loans are essentially a line of credit. A personal loan has an end date (e.g. 5 years from date of funding), whereas a margin loan is ongoing until you don't want it anymore. This is probably the major difference.
* Interest rate is lower than a personal loan because you have either an existing portfolio or cash held as security against the loan.
* Risk side - you could get a "margin call" from the provider if the value of your portfolio falls below a certain level, in which case you have to top it up by either a cash payment or by selling some of your holdings to make it flush again.
* Stocks and products you can trade are limited (e.g. some require a combination of your trades and managed funds; some don't allow options trading; and there are limited companies you can trade).
* Interest is tax deductible.

I am currently in the process of getting a margin loan. I would recommend visiting either commsec or ANZ online. They both have very comprehensive booklets you can download.


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## DionM (20 November 2007)

*Re: Margin lending vs traditional loan*

Thanks guys - just wanted to make sure I hadn't missed anything obvious in my evaluation


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## tech/a (20 November 2007)

*Re: Margin lending vs traditional loan*



cmh888 said:


> * You pay interest only on a margin loan (in terms of your monthly repayments). Of course you can pay back capital, but you are not obliged to in your monthly repayments.
> * No set up fees, unless you are a company or business
> * Margin loans are essentially a line of credit. A personal loan has an end date (e.g. 5 years from date of funding), whereas a margin loan is ongoing until you don't want it anymore. This is probably the major difference.
> * Interest rate is lower than a personal loan because you have either an existing portfolio or cash held as security against the loan.
> ...





*CMH888*
Has covered the main points very well.
Ive been trading margin for 11 years.
Just changed to ANZ as they have a more extensive trade list.

These days I hardly use the margin only when real opportunity to load up occurs and being a short term trader (currently) the interest component for allowing me to double the size of a position is negligable.

I look at it as a bit of insurance as well.
If the stock doesnt make it to the list then its not seen as a fundamental giant by the margin lenders analysts.Hardly extensive I know but more than my fundamental research.

For longterm portfolio trading the interest I found was* pretty well covered *by Dividends and as pointed out interest is tax deductable so very very cheap leverage. If you compare it with longterm holding CFD interest it wins by miles. Your only charged for the interest used in a trade over the time its used.

Sensible leverage is a must in my view.


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## Junior (20 November 2007)

*Re: Margin lending vs traditional loan*

Also try looking at BT margin lending and St George.


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## Bullion (20 November 2007)

*Re: Margin lending vs traditional loan*

Is it easy to get margin loans compared to a regular loan?

I am interested in borrowing for an investment, and as far as I see it will be more beneficial for me to borrow to invest in stocks rather than a property.


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## tech/a (20 November 2007)

*Re: Margin lending vs traditional loan*



Bullion said:


> Is it easy to get margin loans compared to a regular loan?




Not really,you need to deposit cash or stock as security against you M/L.



> I am interested in borrowing for an investment, and as far as I see it will be more beneficial for me to borrow to invest in stocks rather than a property.




Debatable.
Will you invest the same amount in stock as you would a house IE $300,000 + ?
Find an expert accountant in Housing structures (Negative and positive gearing) and Stock investment.A good one will open your eyes very wide.


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## Snagglepuss (20 November 2007)

*Re: Margin lending vs traditional loan*



tech/a said:


> If the stock doesnt make it to the list then its not seen as a fundamental giant by the margin lenders analysts.Hardly extensive I know but more than my fundamental research.




I don't think I agree with this. In my experience, a stock appears on a margin lender's list based on the following factors: (i) market capitalization; (ii) liquidity; and (iii) volatility, with the first two being the most important. I've never seen any indication that they take a company's "fundamentals" into account.



> Stocks and products you can trade are limited (e.g. some require a combination of your trades and managed funds; some don't allow options trading; and there are limited companies you can trade).




This too might be a bit misleading. My margin lender lets me do anything I want with the money they lend me. If I wanted to, I could invest in art or wine or whatever ... the only requirement is that the outstanding loan amount must stay within the appropriate range. There are certainly no limitations on which companies I can trade.



> Why is margin lending popular?




One advantage of a margin loan is that your portfolio is revalued every day. So while it is going up in value, you get more and more funds available for investment, which can be put to work straight away. (No need to apply for a new loan, or pay someone to revalue your property.) This "compounding" effect can add substantially to your returns. Of course, it also works in reverse, your available funds can shrink quickly as your portfolio retreats in value, so be careful out there!

- Snaggle.


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## tech/a (20 November 2007)

*Re: Margin lending vs traditional loan*



Snagglepuss said:


> I don't think I agree with this. In my experience, a stock appears on a margin lender's list based on the following factors: (i) market capitalization; (ii) liquidity; and (iii) volatility, with the first two being the most important. I've never seen any indication that they take a company's "fundamentals" into account.




Snaggles youve dented my security blanket.




> One advantage of a margin loan is that your portfolio is revalued every day. So while it is going up in value, you get more and more funds available for investment, which can be put to work straight away. (No need to apply for a new loan, or pay someone to revalue your property.) This "compounding" effect can add substantially to your returns. Of course, it also works in reverse, your available funds can shrink quickly as your portfolio retreats in value, so be careful out there!
> 
> - Snaggle.





Good point/s


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## jet328 (20 November 2007)

*Re: Margin lending vs traditional loan*



Snagglepuss said:


> This "compounding" effect can add substantially to your returns. Of course, it also works in reverse, your available funds can shrink quickly as your portfolio retreats in value, so be careful out there!




Good point

It's so easy with a margin loan to load up on the tops and then have little purchasing power on the corrections. Pretty sure there were a lot in this situation in August. That's why I always run mine fairly conservative.


Cheers


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## cmh888 (21 November 2007)

*Re: Margin lending vs traditional loan*



Snagglepuss said:


> My margin lender lets me do anything I want with the money they lend me. ... There are certainly no limitations on which companies I can trade.




Can you tell me which lender you go through? As far as my research has led me, all of the major lenders have an approved securities list. I am wondering if maybe the interest rate is higher if there are no limitations?

http://www.anz.com.au/aus/investing/Investing-Your-Money/Margin-Lending/Forms-And-Tools.asp#asl 

http://images.comsec.com.au/MarginLending/Accepted_Shares.pdf?

http://www.bt.com.au/downloads/reports/btml_securities.pdf

http://www.stgeorge.com.au/invest/margin/default.asp?orc=wealth

http://www.nab.com.au/Personal_Finance/0,,89181,00.html


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## RichKid (21 November 2007)

*Re: Margin lending vs traditional loan*



cmh888 said:


> Can you tell me which lender you go through? As far as my research has led me, all of the major lenders have an approved securities list. I am wondering if maybe the interest rate is higher if there are no limitations?
> 
> http://www.anz.com.au/aus/investing/Investing-Your-Money/Margin-Lending/Forms-And-Tools.asp#asl
> 
> ...




Hi cmh888,

This site has been mentioned before for comparing financial products, might be of use as it has comparison tables: http://www.infochoice.com.au/investment/marginlending/default.asp

btw, does anyone know if the transaction fee charged by margin lenders is standard for smaller margin loans (eg $30k-50k)? Commsec for example charges $11 everytime you transact (ie buy or sell a security using $$$'s from your margin ac). This is on top of brokerage- for a regular trader that is a lot of extra $$$ per transaction. I am guessing that if the loan is a few hundred thousand then they'll waive it. 

Any experiences worth sharing or tips on how to avoid it- is it a standard non-negotiable? They are already getting interest for their money, why charge on top of that when most of these transfers are done online through integrated/linked margin and trading accounts (as in the case of commsec)?


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## nomore4s (21 November 2007)

*Re: Margin lending vs traditional loan*



RichKid said:


> Hi cmh888,
> 
> This site has been mentioned before for comparing financial products, might be of use as it has comparison tables: http://www.infochoice.com.au/investment/marginlending/default.asp
> 
> ...




Try this link - http://www.macquarie.com.au/emg/prime/home.htm?source=personal-portal-placeholer

Thay have a very wide range of shares you can use margin with and you can also short most shares. They don't charge a fee for drawdown on the loan. You can use CFD type leverage with MAC Prime if you choose too without the high interest cost that comes with holding CFD's long term, you also get all the benefits of owning shares unlike CFDs. Have been using them for a while now, very happy with the platform and how it all works.


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## RichKid (21 November 2007)

*Re: Margin lending vs traditional loan*



nomore4s said:


> Try this link - http://www.macquarie.com.au/emg/prime/home.htm?source=personal-portal-placeholer
> 
> Thay have a very wide range of shares you can use margin with and you can also short most shares. They don't charge a fee for drawdown on the loan. You can use CFD type leverage with MAC Prime if you choose too without the high interest cost that comes with holding CFD's long term, you also get all the benefits of owning shares unlike CFDs. Have been using them for a while now, very happy with the platform and how it all works.




thx nomore4's, funny thing is I'm with them (CFD & cash ac) but didn't look at things closely enough, maybe their stock list or other costs didn't appeal or perhaps they've have shifted costs to another part of the package that I didn't like, will do the math again....also considering IB's margin trading ac atm but need to suss out a few issues first (see the IB thread).

I have also have been looking at instalment warrants for leverage but I'd say the pricing is higher as mm's don't always price derivatives fairly, but I think I may be able to find some competitive warrants if I am disciplined. I note that macCFD's trading fee minimums have gone up too but their cash ac interest rate is excellent as it is identical to the cash rate, without fees or strings attached (so far).


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## Snagglepuss (21 November 2007)

*Re: Margin lending vs traditional loan*



tech/a said:


> Snaggles youve dented my security blanket.




Gee, sorry 'bout that!


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## Snagglepuss (21 November 2007)

*Re: Margin lending vs traditional loan*



jet328 said:


> It's so easy with a margin loan to load up on the tops and then have little purchasing power on the corrections. Pretty sure there were a lot in this situation in August. That's why I always run mine fairly conservative.




Funny you should mention that ...  I tend to get myself into just that situation - I'm not very good at timing the peaks and valleys of the market yet!

- Snaggle.


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## Snagglepuss (21 November 2007)

*Re: Margin lending vs traditional loan*



cmh888 said:


> Can you tell me which lender you go through? As far as my research has led me, all of the major lenders have an approved securities list. I am wondering if maybe the interest rate is higher if there are no limitations?




I think there may be some confusion here and in earlier posts regarding the difference between what you can borrow AGAINST and what you can borrow FOR.

My earlier comment was a response to the statement that "there are limited companies you can trade".

As an example, suppose I have $100,000 worth of BHP shares, and no loan. My lender offers a margin rate of 75% on BHP. So the "margin value" of the portfolio is $75,000, and my "available funds" value is $75,000. I can take that $75,000 and invest in anything I want - no restrictions.

For example, I could buy $50K worth of Tiny Mining Spec. Ltd. Even though this stock is not on the lender's approved margin list, I can still buy it. After the purchase, I would have a portfolio of two stocks worth $150K ($100K BHP and $50K TMS), an outstanding loan of $50K, and $25K of available funds still accessible.

Or, I could buy $50K worth of Telstra shares, which IS on the lending list with a margin of 75%. In this case, I would have a portfolio of two stocks worth $150K ($100K BHP and $50K TLS), an oustanding loan of $50K, but now my available funds have only decreased to $62,500, because my newly-bought TLS shares allow me to borrow even more money against them.

So, there are NO restrictions on what you can trade (in principle). But there ARE limits on what you can borrow against.

Hope that helps! - Snaggle. 

PS: My current lender is Leveraged Equities.


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## RichKid (21 November 2007)

*Re: Margin lending vs traditional loan*

Hello Snaggles, Thank you very much for those great posts on Margin Lending, between you and tech/a and some of the others here on ASF we should have a very good idea of how Margin Lending works. 

*As a general warning to all readers and posters on ASF please consider this: None of the representations, information, views or posts here on ASF or anything resulting (directly or indirectly) from content or interaction on ASF should be considered to be advice of any kind. This is merely a forum for the exchange of ideas and information. You should seek professional advice suited to your circumstances before making any decision which may result in loss or damage.*

I just had to say that as sometimes the threads become so detailed and helpful that you may forget that the services of an expert familiar with your situation is always desirable.

RichKid
moderator


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## Snagglepuss (21 November 2007)

*Re: Margin lending vs traditional loan*



RichKid said:


> ... sometimes the threads become so detailed and helpful that you may forget that the services of an expert familiar with your situation is always desirable.




Ah yes, definitely! Well worth remembering ...

- Snaggle.


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## RichKid (21 November 2007)

*Re: Margin lending vs traditional loan*



Snagglepuss said:


> Ah yes, definitely! Well worth remembering ...
> 
> - Snaggle.




Glad you understand Snaggle. btw, the post wasn't directed at you but at first time and inexperienced investors and traders generally. Looking forward to your posts, certainly more succinct and productive than mine! Have to say I've gathered a lot from your comments already.


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## chewy (21 November 2007)

*Re: Margin lending vs traditional loan*

If you have a house/mortgage I personally think it is better to set up an equity line of credit. Has all the advantages of a margin loan and none of the negatives  - i.e. only required to pay back the interest, can move cash in and out as much as you want, you aren't restricted to only the listed margin loan approved stocks, you wont get a margin call forcing you to sell at the worst time (i.e. when the SP is low). 

Some people mistakenly think that they don't want to risk their house so take a margin loan - but if you fail to make repayments on a margin loan the bank can still sell your house (or any of your assets) in just the same way!


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## awg (22 November 2007)

*Re: Margin lending vs traditional loan*

Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?

As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?


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## DionM (22 November 2007)

*Re: Margin lending vs traditional loan*



awg said:


> Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?
> 
> As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?




I have two line of credit loans - one for house renos, one for investments only.  Makes the calculations easy.


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## chewy (22 November 2007)

*Re: Margin lending vs traditional loan*

awg - technically it is possible but your accountant will hate you and may even refuse to do it because of the difficulty tracking different expenses and interest etc. As Dion says it is much easier to get the bank to set up a dedicated investment account to make the tax deductions calculations easy as pie.


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## Snagglepuss (22 November 2007)

*Re: Margin lending vs traditional loan*



awg said:


> Does an equity line of credit against your property enjoy the same full tax deductibility as a margin loan?
> 
> As a for instance, if you have a 100k line of credit, and use 50k to fund a share portfolio and 50k to fund renovations, is it a simple matter of quarrantining your interest costs for tax deduction purposes?




Tax deductibility depends only on the PURPOSE of the loan, not on what you are using as collateral for the loan. So yes, a line of credit has the same status as a margin loan, in that sense.

And yes, you need to "quarantine" your interest costs depending on purpose. It is much easier and infinitely preferable to maintain separate loans for separate purposes, just in case there is any doubt about tax deductibility. A "mixed use" loan can very quickly become unmanageable.

There are some subtleties to this in relation to margin loans. Many people decide that, having made some profits in their margin account, they will take out some of these profits to buy a new TV or car or whatever. But it may not be so simple. Normally, as soon as you sell a stock in your margin account, the proceeds of that sale are applied against the loan, reducing your outstanding loan balance. If you then decide to "take out" the profits, your outstanding loan amount will then *increase* by the amount you have taken out. In other words, you are actually increasing the loan in order to buy consumer goods. This means that the portion of the interest that applies to the amount you have taken out, *is no longer tax-deductible*! Your investment loan has suddenly become a "mixed use" loan, and calculating how much of your interest is deductible has suddenly become extremely complicated.

- Snaggle. 

Disclaimer: I am not an accountant nor a tax expert nor a financial planner. I may be wrong (and often am). Please consult a professional for detailed advice.


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## awg (23 November 2007)

*Re: Margin lending vs traditional loan*

thanks for the replies about line of credit tax deductibility.

I sort of use it as a defacto margin loan, so I can stay fully invested.
Its main purpose is to fund renovations, holidays etc 

However it sits mainly idle

The problem with establishing an extra credit line is that the banks charge an establishment fee + stamp duty.

I will consult with my accountant, as I am thinking of using it for several purpopses,(business establishment costs) some tax deductible....so long as I keep accurate records, I am hoping I can claim some tax deductions on interest.

regards tony


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## DionM (23 November 2007)

*Re: Margin lending vs traditional loan*



awg said:


> The problem with establishing an extra credit line is that the banks charge an establishment fee + stamp duty.




You should be able to get it for nil establishment fee, if not, change banks.  I didn't pay when I got one setup with CBA.  Stamp duty, well ... that's pretty much unavoidable when you want extra money, and isn't based on how many loans you have anyway, just the amount.



> I will consult with my accountant, as I am thinking of using it for several purpopses,(business establishment costs) some tax deductible....so long as I keep accurate records, I am hoping I can claim some tax deductions on interest.




The keeping accurate records will be a pain.  Just MHO but I'd go for a separate account, makes life much easier.  If you're with CBA and want to find out to save on a/c fees and establishment fees, have a look at their website for the "wealth package".  Basically once you get to a certain amount of loans with them, all fees are waived and you just pay a single $300 or so annual fee.  Add up $8/mo a/c fees, establishment fees, c/card fees and you can save a few bucks ...


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## Rod_WA (5 December 2007)

*Re: Margin lending vs traditional loan*

Be very careful with mixed use loans!
The ATO has ruled a few times with regards to mixed loans, in particular split loans, saying that there is no way to pay down non-deductible parts of the loan in preference to deductible parts.  It is even more hairy if you plan to use a single standard LOC and move funds in and out for both private and investment use.

Get a separate, interest-only, LOC for investment purposes, before embarking on purchasing shares or funds!

In another matter, deductibility of a ML and LOC are based on the same premise, that is that the investment is "income-generating".  

The ATO tends to allow deductibility of investments in HighlySpec.com, on the basis that there is a reasonable likelihood of future income (not purely future capital gains!).  So it is prudent to maintain a dividend-paying foundation of blue chip shares for your portfolio (but this is just a good idea anyway!).

I have not seen it tested, but for example, an investment in AMP Capital's China Growth Fund (AGF on the ASX) may not be deductible, since the fund's summary states: _"The objectives do not include the payment of regular income to investors."_ This clearly (IMHO) violates the ATO's requirement for income for tax deductibility.

Just some cautions, not advice.


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