Will banks lend you money to invest in shares?

There are lenders out there who will let you borrow money specifically for investing in shares. This kind of borrowing is usually through a margin loan. However, before diving in, it’s crucial to understand that this option comes with considerable risks, and you should seek professional financial advice to navigate the ins and outs.

The idea is pretty simple: borrowing can boost your potential returns when the market is doing well. If you invest borrowed money and the shares increase in value, you can make a much larger profit than if you were just using your own cash. However, there’s a flip side - if the market takes a downturn, your losses can be amplified too.

Using a margin loan can give you access to more funds, allowing you to make bigger investments. This can seem appealing, especially if you're looking to build a diverse portfolio. But remember, with greater potential for reward comes greater risk. You need to weigh these factors carefully before jumping in.

Margin loans are often seen as a long-term investment strategy, typically lasting anywhere from five to ten years. When you take out a margin loan, the shares you buy serve as collateral. This means that if you can’t keep up with your repayments, the lender has the right to sell those shares to recover their money.

Most lenders will also require you to keep your loan-to-value ratio (LVR) below a certain percentage - often around 70%, though this can vary by lender. The LVR is a way of measuring how much you’ve borrowed against the value of your shares. Given that share prices can fluctuate quite a bit, your LVR might change frequently.

If your LVR rises above the agreed limit, you could receive what’s known as a margin call. Essentially, this is a warning that you need to get your account balance back in line. To address a margin call, you might:

• Top up your investment. This means investing more money to increase the overall value of your portfolio.
• Make a repayment. You can pay back part of your loan by depositing cash into your account.
• Sell some shares. You could sell a portion of your shares to reduce your loan balance.

But here's where things can get tricky. If you don’t manage to lower your LVR, the lender may step in and sell your shares for you. And remember, you’ll still need to repay the original loan amount and any interest that has accrued. This can become complicated if your plan was to cover repayments through dividends from your investments.

If you’re considering a margin loan and feel comfortable with the associated risks, your first step is to clearly define your financial goals. What are you hoping to achieve with your investments? Once you have that sorted, you’ll need to decide what shares or funds you want to invest in. At this stage, getting professional financial advice is a sensible way to ensure you’re making informed choices.

After you’ve nailed down your investment strategy, it’s time to shop around and compare to find the best rates on margin loans. This way, you can make sure you’re getting the best deal while working towards your investment goals.

Before borrowing money to invest, it’s helpful to have a well-thought-out investment strategy. Here are a few points to consider:

• Risk tolerance. Assess how much risk you’re willing to take on. Understanding your risk profile will guide your investment choices and borrowing limits.
• Diversification. Don’t put all your eggs in one basket. A diversified portfolio can help mitigate risk and improve your chances of returns.
• Market research. Stay informed about market trends and economic indicators. Knowledge is power when it comes to making informed investment decisions.

Having a clear strategy can not only improve your chances of success but also help you feel more secure in your investment journey.

If you’re hesitant about using margin loans, there are alternative ways to invest in shares that may suit your financial situation better:

• Dollar-cost averaging. This strategy involves regularly investing a fixed amount of money into shares, which can help reduce the impact of market volatility.
• Exchange-Traded Funds (ETFs). ETFs allow you to invest in a diverse portfolio of stocks without the need for a margin loan. They provide instant diversification and are often lower cost.
• Managed funds. Consider investing in managed funds, where professionals manage your investments for you, taking the guesswork out of stock selection.

Exploring these alternatives can help you find investment methods that align with your financial goals while avoiding the risks of borrowing.

Not all lenders are created equal, so it’s important to do your homework. Here are some tips for finding the right lender:

• Compare rates and fees. Look beyond just the interest rate. Compare any associated fees and costs, such as account maintenance fees or withdrawal fees.
• Lender reputation. Research the lender’s reputation and customer service. Online reviews and ratings can provide insights into their reliability and responsiveness.
• Flexibility. Choose a lender that offers flexibility in terms of LVR limits, repayment options, and loan terms. This can make a significant difference if your financial situation changes.
• Features. Consider lenders that allow you to transfer your margin loan to another account or investment without penalties. If you use a specific investment platform, check if the lender integrates with it.
• Support. You may want a lender that offers educational webinars and workshops that cover margin lending, risk management, and investment strategies. 

By carefully evaluating your options, you can find a lender that meets your needs and supports your investment goals.