MARGIN LOANS

What is a protected loan?

What is a protected loan?
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There are many ways to invest your hard-earned money but sometimes it’s finding the funds to invest, in the first place, that becomes the biggest investment hurdle and why many look to margin loans as an answer.  

Borrowing as a way to fast-track wealth creation is a strategy extolled by various financial experts. Indeed, few of us would ever own our own homes without borrowing money, so borrowing to invest in assets such as shares should, in theory, be okay. After all, it takes a lot less money to buy shares than it does to purchase a home.

But although borrowing money to invest can seem like a sound strategy when interest rates are low and the price of the assets is on the rise, predicting future movement is as easy as nailing jelly to a wall.

There is the view that in times of share market turbulence, good shares can be picked up cheaply. So how can you take advantage of the market downturn, yet keep your investment from disappearing? One damage-limitation strategy to hedge against a fall is to use a protected margin loan.

A protected margin loan offers investors a 100 percent loan-to-value (LVR) ratio on a portfolio of shares in return for charging a higher rate of interest. In this way, an investor’s investment is protected, while profits can still be multiplied through high gearing so that the only financial risk for the investor is a higher interest rate. This means that (excluding trading costs and tax implications) your investments must gain an annual percentage that matches your loan interest rate charges in order for you to break even but for those willing to gamble their interest payments on strong stock markets, this may be a low-risk strategy you could adopt.

Protected margin loans can allow you to build a direct shares portfolio, refinance an existing margin loans, or gear within your self-managed superannuation fund (SMSF). You can also choose your shares, investment term, loan amount and choose between fixed and variable interest rates.

If the prospect of market turmoil is not something that your investment strategy can withstand, then a protected loan may be the answer.