Margin loans
If you’ve borrowed money from a financial institution to invest in shares or managed funds, your margin loan will be secured against your investments, and possibly against any other investments you have.
Using a margin loan is a high risk credit and investment strategy that placed many people in a vulnerable financial position during the global financial crisis. If you have a margin loan and you lose your job, you will have to act very quickly to minimise the risk to your financial stability.
When is a margin call made
Banks and financial institutions will call up margin loans if you have borrowed up to the agreed limit, and the value of your investment falls. When your lender makes a margin call against your loan, you have to pay the difference between the value of your investments and the amount you have borrowed to invest.
If your lender makes a margin call at a time when the share market is falling, your financial situation may be under considerable stress because general falls in share values may mean it is the worst time to sell. If you have margin loans, you should seek advice from a financial planner. Financial counsellors do not have expertise in margin loans.
You must be contactable
If you have a margin loan, you must always be contactable. If you will not be available, you should nominate another person (who will be contactable) to make decisions about the loan on your behalf.
You usually have to respond to a margin call within 24 hours. If the lender cannot contact you, any decision they make regarding your loan will be binding on you.
Your margin loan options
Choice magazine has presented the following scenario to demonstrate your options when a margin loan is called up:
- paying back part of the loan from your other assets. For an investment portfolio worth $100,000, you may borrow $70,000 or 70% of the portfolio’s “loan to value” ratio. If the value of the portfolio falls to $90,000, you can now only borrow 70% of that, which is $63,000. So you need to pay back $7000 in cash.
- lodging other shares as security. You need to restore the value of your portfolio to its nominated value … $100,000 in the case of our example. Providing other shares you own are on your lender’s list of approved shares, you can lodge these shares as security to avoid having to make a cash payment when you get a margin call. The number of shares required will depend on their loan to value ratio. In a depressed market, shares of a higher value and larger packages of shares will be necessary to achieve the required security lodgement.
- selling part of your portfolio to pay back the loan. If selling your shares does not yield sufficient funds to pay back the loan in full, you may have to find additional funding to satisfy the margin call.
Find out more about debt collection procedures.
Your rights
If you have a dispute you may complain to the relevant external dispute resolution scheme. Your lender has responsible lending requirements under the Corporations Act.