A margin loan is special type of interest-bearing loan secured by shares. Such loans are available from banks, but they are also marketed by organisations associated with some stockbrokers. A minimum loan size is usually imposed.
Whether such a loan is suitable for you will depend on your circumstances. Margin loans are not really suitable for low income earners, inexperienced investors, undisciplined borrowers, speculators or investors with short term horizons. The chief characteristics are commonly as follows:
1. The loan is secured over one or more specific parcels of shares. These can be shares already held or shares being purchased with the loan funds or a combination of both. The maximum loan granted is based on the market value of the shares pledged and the lender’s views of their quality and the volatility of their share price. Typically 30 to 70 per cent of the value of a stock can be borrowed.
2. The shares will need to be those of companies on the lender’s list of approved securities – basically non-speculative situations. Some unit trusts may also be acceptable.
The shares can be held in the names of individuals, companies, partnerships or trusts. The loan can, if desired, be in a different name from that used for the shares. The shares are registered in the holder’s name through CHESS.
An attractive feature is that no other security needs to be provided and no credit checks are required. The facility can also be used as a revolving line of credit, with the outstanding balance moving up or down to suit the investor’s convenience. It can be put in place ahead of the initial shares actually being acquired. A fixed term is not required.
The loan is granted on an “interest only” basis, but the interest rate is likely to be higher than in the case of loans secured by mortgages on property and with recourse to the borrower’s total assets. The interest if the loan is used to acquire investments is tax-deductible. A choice of fixed and variable rates may be available. Various transaction fees will apply.