Margin Loans Still Popular

Sydney Morning Herald

Saturday December 5, 1998

JOCELYN EASTWAY

Despite an uncertain outlook for financial markets, many investors are still keen to take out a margin loan to boost their exposure to shares.

With margin lending, you can often borrow up to 70 per cent of the market value of shares or managed funds chosen from a lender's menu.

You need to deposit enough cash or other investments to make up the difference - known as the "margin".

The shares (or managed funds) themselves act as security on the loan.

So if they drop in value and your margin falls below the agreed amount, the lender might ask you to sell some shares or deposit more cash - known as a "margin call" - to restore it to an acceptable level.

To avoid margin calls, investors often borrow less than the maximum allowed (say, 50 per cent of the shares' market value, instead of 70 per cent).

That way, the value of their portfolio would need to fall by a substantial amount before they would be asked to meet a margin call.

The potential tax breaks from gearing or borrowing to buy shares make margin loans particularly attractive towards the end of a financial year. In most cases, you can claim a tax deduction for your borrowing costs.

You can pre-pay interest up to 13 months in advance and claim the whole lot as a tax deduction in the current financial year.

And in the case of "negative gearing" - where the borrowing costs exceed the income from an investment in a given year - there's an "excess" tax deduction that can be offset against your other income, such as salary and wages.

Australia's biggest margin lenders include Bankers Trust, Leveraged Equities and Deutsche Bank.

All of these lenders also offer protected equity loans, where you pay a higher interest rate to ensure zero capital loss on your borrowed money.