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It’s a common thought that to be eligible for a margin loan you need to have a large investment portfolio. Simply put – no you don’t!
The minimum loan amount is $20,000, so provided you are comfortable to borrow at a 75% Loan to Value Ratio (LVR), all you would need to get started is $6,667 of your own security. Security can be in the form of cash, shares or managed funds*.
Because the amount you can borrow with a margin loan increases as your portfolio value increases, you can start with a small portfolio, and increase your investments over time.
In addition, you can increase the diversity of your portfolio as your investments grow. This is beneficial as it can substantially reduce your risk, without substantially reducing your long-run returns.
The maximum amount you can borrow against each security is called its Security Value and is determined by the Loan to Value Ratio (LVR) ANZ applies to the security. It’s calculated by:
Security Value = Market Value of Security x Loan to Value Ratio (LVR)
For example, if you owned $10,000 worth of stock with an LVR of 70%, then the security value would be $7,000.
$10,000 (market value) X 70% (LVR) = $7,000 (Security Value)
The LVR for each stock and managed fund is listed on our approved securities list (ASL). (An LVR is not an investment recommendation. If a stock has a high LVR, that doesn't necessarily mean it's a good investment, and vice versa.)
If you hold a portfolio of shares, the maximum you can borrow is the sum of the security value of all securities in your portfolio.
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Stock 1 |
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$10,000 |
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70% |
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$7,000 |
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Stock 2 |
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$10,000 |
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60% |
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$6,000 |
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Managed Fund |
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$20,000 |
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60% |
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$12,000 |
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Total |
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$40,000 |
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$25,000 |
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The amount you decide to borrow depends on several factors:
Firstly, what security can you contribute to the initial investment? This security can be in the form of cash (which needs to be deposited into your margin loan account), or existing shares or managed funds that you already own.
Secondly, what level of risk are you comfortable with? Although ANZ may lend up to 75% on a security, you may choose to borrow less, say 50%, to increase the buffer between your portfolio and a margin call.
To use your margin loan effectively you borrow against the value of your current portfolio to buy more equities, and then use the value of these shares to buy further shares. This is the multiplier effect.
The LVR of the security you decide to invest in determines the maximum amount you can purchase. This is because the security value of the newly purchased stock is taken into consideration at the time of purchase.
If you had $25,000 excess Security Value and chose to invest in a stock (Stock 3) with a LVR of 75%, then the calculation to determine how much you can borrow to purchase this stock is:
Max. Amount of Stock 3 you can buy = $25,000/(1-75%) = $100,000
In this example, you could purchase up to $100,000 of stock without contributing any additional cash by borrowing against your existing portfolio. Your total portfolio for this example would then look like this:
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Stock 1 |
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$10,000 |
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70% |
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$7,000 |
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Stock 2 |
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$10,000 |
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60% |
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$6,000 |
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Managed Fund |
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$20,000 |
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60% |
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$12,000 |
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Stock 3 |
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$100,000 |
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75% |
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$75,000 |
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Total |
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$140,000 |
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$100,000 |
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Your Contribution |
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$40,000 |
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Loan amount |
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$100,000 |
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*These need to be from our market leading Approved Securities List (ASL).
Leveraging a portfolio is fast becoming a popular wealth creation strategy. However, you should be aware that while leveraging into investments increases the potential return on investments, it is important to recognise that it can also multiply the effects of falls in share market values. We therefore strongly advise you talk to your financial planner and/or stockbroker and ensure you understand the risks, the specific tax implications, as well as the legal and financial ramifications of a margin lending facility.
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