Model leveraged investment returns, total interest cost, LVR, and your margin call trigger point.
How Margin Lending Works
A margin loan lets you borrow against your existing investments or cash to invest a larger total amount. If you have $50,000 and borrow another $50,000, you invest $100,000 — doubling your exposure. If the investment grows 10%, your $100,000 becomes $110,000. After repaying the $50,000 loan, you keep $60,000 — a 20% return on your $50,000 own funds.
The same leverage works in reverse. A 10% loss on a $100,000 portfolio leaves $90,000 — but after repaying the $50,000 loan, you only have $40,000 — a 20% loss on your own funds.
Margin Call Risk
Lenders set a maximum LVR (typically 70% for diversified blue-chip portfolios). If the portfolio falls in value so that the loan-to-portfolio ratio exceeds 70%, the lender issues a margin call — you must restore the LVR within 24 hours by depositing cash or selling assets. This can force you to crystallise losses at the worst possible time.
When Does Leverage Make Sense?
Leverage adds value only when the investment return exceeds the interest rate. With an 8% return and 7.5% interest rate, the margin is slim — and requires the investment to consistently outperform. In flat or falling markets, you pay interest with no offsetting return. Leverage is best suited to long-term investors in higher tax brackets who can deduct interest costs.
Frequently Asked Questions
What is a margin loan?
A margin loan is a loan secured against an investment portfolio that lets you borrow money to invest more than you have available. This amplifies both gains and losses. Lenders typically allow up to 70% LVR on diversified share portfolios.
What is a margin call?
A margin call occurs when your portfolio value falls enough that the loan-to-value ratio exceeds the lender's maximum (usually 70%). You must top up cash, sell assets, or repay part of the loan — typically within 24 hours. Market crashes can trigger margin calls across many investors simultaneously, amplifying market falls.
What is LVR in a margin loan?
LVR stands for Loan to Value Ratio — the loan amount divided by the total portfolio value. A $30,000 loan on a $100,000 portfolio is 30% LVR. Most margin lenders allow up to 70% LVR on blue-chip Australian shares before a margin call is triggered.
Is margin lending tax deductible in Australia?
Interest on a margin loan used to invest in income-producing assets is generally tax deductible in Australia. This is a key attraction for investors in higher tax brackets. For example, at 37% marginal rate, a $7,500 interest cost effectively costs $4,725 after tax. Always consult a registered tax adviser.
What are the risks of a margin loan?
Margin loans amplify losses as well as gains. Margin calls can force you to sell at the worst possible time. Interest costs erode returns even when markets are flat. Margin lending is only suitable for experienced investors with a long time horizon and the financial capacity to meet margin calls without selling investments.