Margin lending can offer a range of benefits including:

• Bigger returns. A margin loan gives you more to invest and you have the potential for bigger returns.
• Unlock the equity in your existing investments. Raise cash for investment purposes without having to sell your investments
• Support your retirement goals. Investors may use a margin loan as a means of building their wealth for retirement.
• Greater diversification of your portfolio. Spread your investments across a broader range of assets to build a more diversified portfolio.
• Margin lending can be tax-effective
  • Interest paid on your loan is generally tax-deductible.
  • Interest can be paid up to 12 months in advance and you may be able to get an additional tax deduction for the prepaid interest in the current financial year (subject to your ability to satisfy the tax prepayment rules).
  • By borrowing against your existing portfolio, you may increase the size of your investment without having to sell your existing portfolio and potentially create a capital gains tax event.
  • Australian shares often generate franked dividends, which yield imputation credits that may be used to offset other tax liabilities.

The most common risks are outlined below.

Market volatility, margin calls and the risk of losing assets

If the market declines, so will the value of your portfolio. It may fall to a value where it no longer provides adequate security for your margin loan.

As the value of your security portfolio falls, this in turn reduces your borrowing limit. This in turn will cause a rise in your gearing level, as your loan balance has not changed. A margin call will occur when your loan balance exceeds the borrowing limit by more than the buffer.

You also need to be aware that a margin loan is a “full recourse” loan. This means that even if the value of your security portfolio falls to zero, you are still liable to repay the total loan balance outstanding. This means that you may need to sell other assets you have to clear the outstanding debt.

LVR Changes

The LVRs which are applicable on your security portfolio are subject to change at any time and may also be reduced to zero. This will affect your borrowing limit and may result in a margin call depending on your gearing level.

Interest rate changes

Variable interest rates are subject to change at any time. In a rising interest rate market, your monthly interest costs will also increase. The interest expense on your loan balance may exceed the distributions/dividends you earn on your investments and unless you have an adequate alternate source of income to fund the interest costs, a margin call may occur.

Changes to dividend payments

The timing of dividend and distribution payments may not coincide with your interest payments. Also, these payments that you may be relying on to assist with servicing your interest costs, may reduce or not be paid at all. In these instances, you need to ensure that you have an alternate source of income that can assist with servicing your monthly interest.

Geared equity

If the equity you have provided on your margin loan has been borrowed from another source, your overall gearing level will be higher. The higher the overall gearing level, the greater the effect that any fall in the value of your securities will have on your financial situation.

Taxation laws

Tax laws are complex and may change over time, possibly with retrospective application. You should seek the advice of an independent tax adviser on the tax consequences and impacts of entering into a St.George Loan Facility.