What is margin lending?
A margin loan lets you borrow money to invest in shares, managed funds, master trusts and wraps. This is also known as gearing. Just like investing in property where the loan is secured against the property, you margin loan is secured against your shares, managed funds, master trusts and wraps. A margin loan gives you more to invest, and you have the potential for bigger returns. This is shown in the chart below. Of course, this also magnifies the potential for losses if investments perform poorly.
The chart below shows the after tax return on a geared and ungeared portfolio over 12 months on a range of capital growth rate scenarios. Based on the assumptions used in this example*, a geared portfolio will outperform the equivalent ungeared portfolio (on an after tax basis) if capital growth exceeds 2.3%. Therefore, if your capital growth exceeds 2.3%, gearing may add value to your investment strategy. However it should be noted that a gearing strategy may also increase the potential for losses.
* Chart assumes a gearing level of 50%, interest rate of 9% pa, income yield of 4.5% pa and a franking level of 60%. Franking credits are subject to the holding period rule and it is assumed the individual has other income to offset the tax benefit. The tax rate assumes a resident individual on a tax rate of 45% and a Medicare levy of 1.5%. The Medicare levy surcharge has been ignored for the purpose of this calculation. It is also assumed the individual acquired the shares to produce assessable income such as dividends or assessable distributions. In calculating CGT liability, it is assumed the individual has no other capital losses to offset the capital gains and the assets are hold on capital account with the 50% capital gains tax discount applied to taxable capital gains as the investment is held for 12 months. No sell-down of security as a result of a margin call event during the 12 month period is assumed.
St.George Bank – A Division of Westpac Banking Corporation is the issuer of the St.George Margin Lending Margin Loan Product Disclosure Statement (“PDS”). This information has been prepared without taking into account your personal objectives, financial situation or needs. For this reason, before acting on the information you should consider its appropriateness to your objectives, financial situation or needs and consider the disclosure documents which include the PDS. The PDS and other disclosure documents are relevant when deciding whether to acquire or hold this product and can be obtained by calling 13 33 30. Applications for credit are subject to the Bank’s prevailing lending criteria. Terms and conditions apply to the product. Examples and projections given are for illustrative purposes only and cannot be relied upon as any indication of the outcomes of investment. Any projections given are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which any examples or projections are based are reasonable, the examples or projections may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these examples or projections. Neither Westpac Banking Corporation nor any of its respective directors, officers, employees, associates or its subsidiaries guarantee or give any assurance in regard to the capital value, income return or performance of any securities or investments acquired through or in relation to a St.George Margin Loan.