How a margin loan works

You don’t need to have a large investment portfolio to get started. If you’re new to borrowing to invest the best way is to start small, at a level well within your comfort zone.

The maximum amount you can borrow through a margin loan is determined by the value of the shares, managed funds and cash you are using as security against your loan, and is based on a percentage of the overall value of these assets. This is known as your ‘Loan to Value’ ratio or LVR.

The LVR for most shares or managed funds is between 40% and 75% of the current overall value of your security.

As an example, if XYZ Ltd shares were used as security against a margin loan, based on the LVR, you could potentially borrow up to 70% of the current value of these shares.

The amount you could borrow against each security is called its Security Value. It is determined by the Loan to Value Ratio (LVR).

Example: If XYZ Ltd shares are valued at $1.00 each, and the LVR is 70%, you can borrow $0.70 (security value) for each XYZ Ltd share you own.

As your investments grow, and the value increases, you could borrow more to increase the size and value of your portfolio, as you see fit. This is known as the ‘multiplier effect’ and is one of the potential key benefits of a margin loan. 

Of course, the ‘multiplier effect’ can work for you or against you, magnifying both gains and losses.  This is why it’s always wise to seek professional advice about how much to invest, which shares and managed funds to purchase, when to sell and to keep in mind the potential benefits of minimising risk through diversification.

Step 1 – Getting Tony started

Tony has an existing portfolio of shares worth $40,000.  He decides he’d like to get ahead faster by taking out an ANZ Share Investment Loan. Tony has decided to use his existing portfolio as security in order to buy more shares. 

The amount Tony can borrow against his existing portfolio is the sum of the security values in his portfolio.

Existing portfolio	Market value	Loan to value ratio (LVR)	Security value
Stock 1	$20,000	75%	$15,000
Stock 2	$20,000	50%	$10,000
Total	$40,000		$25,000

Step 2 – Getting the ‘multiplier effect’ working for Tony 

Tony decides to buy shares in a company called Stock 3, which has an LVR of 75%. Tony is able to purchase $100,000 worth of Stock 3 shares, by using his existing portfolio as security for an ANZ Share Investment Loan.

How does this work?

To find out how much he could buy, Tony did the following calculation:

Security value ÷ (1 - LVR of Stock 3)
$25,000 ÷ (1 - 0.75) = $100,000

New portfolio	Market value	Loan to value ratio	Security value
Stock 1	$20,000	75%	$15,000
Stock 2	$20,000	50%	$10,000
Stock 3	$100,000	75%	$75,000
Total	$140,000		$100,000

Loan Amount = $100,000

Examples are used for illustration purposes only and are not intended as advice. This material does not take into account your needs and financial circumstances and you should consider whether it is appropriate for you.

As with most loans you are charged interest on the drawn loan amount. You can select either a variable or fixed interest rate:

Variable rate
A variable rate loan acts like a line of credit. You can draw down when you need it, or repay part or all of the loan if you sell securities or receive dividends. The interest rate charged on your loan may change depending upon market movements.

Fixed rate
A fixed rate loan could give you greater peace of mind because your interest payments are 'locked-in' and you don't need to worry about interest rate rises for the term of the loan. The interest rate is usually less than a variable loan, and as an added benefit, you may be able to claim all of the interest expense as a deduction in the current tax year.

ANZ offers a wide range of fixed loan terms, from 3 months to 5 years. You can choose to:

• pre-pay interest in advance
• pay the interest monthly in arrears.

It is important to note that prepaid interest is not refundable and break fees may apply if the loan is paid out while in a fixed rate period.

View the latest fixed and variable interest rates.