How does margin lending work?
Most margin loan facilities offer you two options:
- Lump Sum Gearing or
- Regular Gearing
With Lump Sum Gearing, you start with a lump-sum investment into managed funds and/or shares when the loan is established. Once your margin loan is set up you can choose to add to your investment or reduce your exposure.
Regular or Instalment Gearing combines the power of a margin loan with all the benefits of a disciplined savings plan. Regular Gearing is where you combine your contribution with a borrowed amount using a margin loan to increase the size of your investment in one or more managed funds each month.
Example of a regular gearing strategy
Why use margin lending?
Borrowing to invest can allow you to:
- increase the size of your investment portfolio which can allow you to grow your wealth at a faster rate. A margin loan increases the amount of money you can invest. As your investment capacity rises, so too does your ability to increase wealth.
- diversify your investments. As you have more money to invest you can spread it across a variety of shares and managed funds. Losses in one investment can be offset by gains in another. Diversification can reduce the investment risk of your portfolio and make your returns less volatile.
- access cash without selling your existing shares or managed funds. A margin loan allows you to unlock the equity you have in existing investments without triggering capital gains.
- reduce your taxable income because interest paid on a margin loan is generally tax deductible (depending on your circumstances) when the loan is used to invest in managed funds or shares.
What are the risks involved?
Borrowing to invest can enhance your investments and returns, however if your investments perform poorly it can also increase your losses.
Other risks associated with margin lending include:
- dividends or distributions may be lower than expected or none may be paid at all;
- interest rates may increase on variable interest rate loans;
- margin calls may require investments to be sold quickly at unfavourable prices if you are unprepared;
- tax legislation or marginal tax rates may change.
There are a number of things you can do to reduce the risks associated with a margin loan. For example, borrowing less than the maximum allowed reduces the risk involved.
Before you apply for a margin loan, you should speak to your financial adviser who will be able to help you put an appropriate strategy in place. Investors should also obtain professional taxation advice that addresses their individual circumstances before taking out a margin loan.
To apply for a Colonial Margin Loan, simply download and complete the
Application Form
above. It’s that easy!
For more information about margin lending and Colonial
Geared Investments please click
here.
Colonial Geared Investments is part of the Commonwealth Bank of Australia ABN 48 123 123 124
