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Q&A - Margin lending

What is your opinion on margin lending for the share market?

As with all borrowing, you have to do your homework and understand what you are signing yourself up for. I believe margin lending is no different in this respect. However, with margin loans more than other loans, it is very important that you read the loan document so you understand the terms and conditions of the loan you are applying for (particularly as some margin loans are different from others). One thing to watch out for is that you retain ownership of the shares. Other things to look for are the lending ratios and the stocks or managed funds that you can borrow against.

Before entering into a margin loan, you should examine the consequences on your debt position if your investments were to fall dramatically in value. Will this result in a margin call?

The other things to do are to ensure you can meet the interest payments if rates rise and to ensure you have access to emergency funds that can be contributed to the loan if you are asked by the lender to top up your equity (that is, a you are margin called).

It is also important that your own income is stable (as you would with any debt obligation) so that you can meet you repayment obligations. I would suggest you have adequate personal risk insurance in place to provide you with funds should you not be able to work due to illness or injury (including permanent incapacity) and to protect your family if you were to pass away suddenly (so, life cover to pay out the loans).

Finally, you should remember that you’re borrowing to invest and in doing so you have taken on more risk so you need to obtain higher returns to be rewarded for this risk.

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Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, August 05, 2009

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