MARGIN LENDING. GEARING. Borrowing to invest or “gearing” is an increasingly popular investment strategy in Australia. Individuals, companies and even governments all use gearing in some form to increase their investment power and liquidity. A popular form of gearing for Australian individuals is borrowing to invest in residential real estate. However, an increasing number of Australians are discovering the benefits of gearing into the sharemarket.This strategy can be done via Margin Lending. We can to provide an adviser who can advise you on building a margin lending solution - and also provide a proactive and flexible platform, which is readily available when you need it. WHAT IS MARGIN LENDING? A margin lending facility is simply a line of credit (much like an overdraft), which is secured by shares or managed funds (known as “security” or “collateral”). The amount that you may be permitted to borrow or “gear” through margin lending is determined by the type and value of the security you lodge. Most margin lenders will lend between 30% and 85% against the market value of ASX100 approved securities. The amount we recommend is a maximum of 50%, and even that amount has risk in extreme market moves. SHOULD I USE MARGIN LENDING? I N C R E A S E  T H E  L I Q U I D I T Y A N D  D I V E R S I T Y  O F  YO U R P O RT F O L I O. Through a margin loan, you can borrow against your existing share portfolio and use the funds to make further share purchases without selling your existing shareholdings.This gives you the opportunity to diversify your existing investments and increase the liquidity of your portfolio. I N C R E A S E  YO U R  S P E N D I N G A N D  I N V E S T M E N T  P OW E R . The Flexible Investment Facility allows you to borrow against the ASX100 approved securities.This allows you to increase the size of your investment portfolio over and above the amount that you could have invested with your own funds. As the value of your investments increase, so do your potential returns. B E N E F I T  F R O M  P O S S I B L E TA X  A DVA N TAG E S . There are a number of potential tax benefits associated with margin lending, these include: Interest deductibility: Interest costs charged on margin loans may be tax deductible. If the interest cost of the loan is greater than the income received from the investment portfolio (eg. dividends and franking credits), you may be able to offset these costs against your other assessable income.This concept is referred to as “negative gearing”, however borrowing to the point of having negative geared shares is a high risk strategy. Prepayment of interest: You can elect to prepay the interest on your margin loan for up to 12 months in advance. In doing so, you fix the amount of interest paid and bring forward a tax deduction against your other income in the current financial year. Reduced capital gains tax liabilities: When you sell existing investments, you may be inadvertently forcing a capital gain within your investment portfolio. Borrowing against your existing investment portfolio enables you to fund additional purchases without selling your existing investments. By retaining an investment for more than 12 months, you may be eligible to receive a capital gains tax concession. Increased franking credits: By increasing your exposure to the sharemarket through a margin loan, you increase your ability to receive more dividends and franking credits.This may be valuable to you depending on your financial and tax circumstances. Tax consequences of margin lending are specific to each individual.Therefore, we recommend that you obtain professional, independent tax and legal advice on the suitability of margin lending for your financial affairs. The graphs on the following pages are examples only.They are provided to illustrate how your investment funds can be influenced through margin lending. IMPACT OF RETURNS THROUGH GEARING   * Assumptions are based on the lodgement of $50,000 cash and do not take into account interest charges, dividends or franking credits. (Please note: interest charges will reduce your returns). The above graph is an example only, which illustrates how your investment funds can be influenced through margin lending, and is not an indication of actual or future performance. 1. ASSUMING NO BORROWING IN YOUR PORTFOLIO. If you elect not to borrow and simply invest $50,000 into the sharemarket, you would generate a return of $5,000 assuming the value of your investments increase by 10%. 2. ASSUMING YOU GEAR UP TO 50% ON YOUR PORTFOLIO. Alternately, if you elected to gear your $50,000 by borrowing an additional $50,000 (this gears your port folio to 50%), you would increase your investments to $100,000. Assuming the value of your investments increase by 10%, a return of $10,000 would be achieved, however by using the margin lending facility even at this low level, you may have increased your risk level and volatility of your portfolio. 3. ASSUMING YOU GEAR UP TO 75% ON YOUR PORTFOLIO. Gearing your $50,000 to 75% increases your investment port folio to $200,000, and would enhance your returns even further if the value of your investments increase. For example, you would achieve a return of $20,000 assuming the value of your investments increase by 10%, and a return of $40,000 if your investments were to increase in value by 20%. As can be seen by this example, the higher you gear the greater the potential returns on your equity. However, you should also be aware that this is a high risk strategy and a decrease in the value of your investments could have a disasterous impact on your portfolio. Remember you need to set up a client account or trading account and enable options on that account before you can start trading options. This can take 1 to 3 weeks to finalise. See also; Buy Write, Covered Calls, Renting Shares.