Investors have a history of gearing into property - for example, by borrowing funds to purchase an investment property. However many are becoming aware of the benefits of borrowing to invest (otherwise known as gearing) into other assets, such as market shares, according to Macquarie Lending NZ.
Gearing works on
the principle that if you can earn a better return on borrowed money than it costs you by way of interest, and you can manage the risk involved, then it becomes an attractive proposition.
There are different approaches to gearing and a variety of products available. One of the common methods of gearing into shares is through a margin loan. A margin loan allows you to invest more, potentially increasing the size of your returns.
A margin loan is a flexible line of credit to invest in shares. Typically, this means borrowing against your existing assets. In the same way that property investors put down a deposit and borrow the rest, a margin loan allows you to buy a significant share portfolio with as little as a 25 per cent deposit. This deposit can be in the form of cash, shares or a combination.
Most margin loans have a list of approved securities, that is, you use the funds provided to purchase shares on the lender's approved securities list. This can include domestic and international shares.
Each approved security has its own Loan to Value Ratio (LVR), representing the maximum amount that the lender is prepared to advance against that security. This is usually between 40 per cent and 75 per cent of the market price of the security.
What's more, a margin loan can be a potentially tax efficient investment strategy. This is because interest on the loan is generally tax deductible.
Margin loans have many benefits but there are also risks involved. They are not suited to everyone and it is important to seek independent financial advice if you are considering such a strategy. You should speak to your financial adviser to understand the potential risks and taxation aspects of margin loans.
Find out how a margin loan works at the Property and Investment Expo, where Macquarie will hold information sessions on gearing into shares.
