Will banks lend you money to invest in shares?
Yes, there are lenders which will allow you to borrow money for the purpose of investing in shares.
Typically, you’d borrow money to invest through something called a margin loan.
However, it’s considered a high-risk financial decision, which shouldn’t be taken lightly or done without substantial understanding of the pros and cons – not to mention the aid of professional financial advice.
Why do people borrow money to invest in shares?
When you borrow money to invest in shares, there’s a potential for bigger returns when the market goes up, as well as the inverse: larger losses when the market goes down.
This is because when you take out a margin loan, you will likely have access to more money to invest with, hence increasing your potential returns, or giving you the ability to make bigger investments.
But margin loans don’t come without their fair share of risks.
How does borrowing money with margin loans work?
Margin loans are considered a long-term investment strategy, and are typically taken out over a period of five to ten years.
The shares you invest in are put up as security for the loan, meaning that if you fail to pay off your initial loan amount, the lender will sell them off to recoup their losses.
A margin loan lender will also likely require you to keep the loan to value ratio (LVR) below a certain threshold. The target LVR will typically be somewhere around the 70% mark, but this can differ between lenders.
Due to the volatility of share trading, expect that your LVR will move up and down a fair bit. But, if your LVR exceeds the agreed-upon threshold with your lender, then you may get a margin call.
A margin call is an ominous way of saying that your account is running low on funds. Your lender will ask you to reduce the LVR on your loan, which you can do by:
- Topping up your investment to increase the value of the portfolio
- Repaying some of your loan balance by depositing money
- Selling part of your share portfolio to repay some of your loan balance
However, and this is where borrowing to invest in shares gets dangerous, if you don’t manage to lower your LVR, then the lender may have to sell off the shares you have to lower it themselves.
What’s more, you will still have to pay off the principal loan amount and any interest you accrue. This can be tricky, depending on how much you borrowed – especially if you had planned to make repayments using your investment dividends.
Let’s look at the pros and cons of using margin loans to invest in shares.
Pros and cons of borrowing money to invest in shares
| Pros | Cons |
| Lower entry and exit costs than other investments i.e. property. | Potential for large losses due to market volatility or poor investment decisions. |
| More liquidity than other investments. | If you can’t make repayments, or have to sell the investments at a loss, you still have to pay off the principal loan amount. |
| You can build a bigger investment portfolio because you have access to more money. | The interest repayments on the loan may outweigh your investments gains, or negate profits. |
| You may be able to borrow using your existing portfolio as security, increasing your portfolio (and potential diversification) without having to add in extra cash. | You have to adhere to the lender’s LVR requirements, which can change at their discretion. |
| Potential for higher returns, due to access to more money. | A variable margin loan rate can go up, leading to more expensive repayments. |
| Long-term strategy (5 – 10 years). |
How to borrow money to invest in shares
If you’re comfortable with the risks associated with borrowing money to invest via a margin loan, then your first step will be identifying what your financial goals are.
From there, you’ll need to work out what you’ll be investing in – for this part of the process, it’s advisable to seek financial advice from a professional.
After that, have a look at some of the rates on offer right now with Mozo’s handy margin loan comparison tool.
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