Margin calls are in steady decline
- From: National Features
- February 28, 2011
Shareholders use margin loans to borrow to invest
IN a sign of share market stability, margin calls have blown out to one in 1650 customers, a far cry from almost one in 100 at the height of the global financial crisis two years ago.
Margin calls are made when the value of the stocks within a margin lending portfolio falls and breaks through its loan to value ratio (LVR), which measures the value of shares secured against the loan and is usually limited to 70 per cent.
These kind of loans available from all major banks enable borrowers to invest a larger sum of money by taking out a loan. Rates are generally 2 per cent higher than a variable home loan rate.
Data shows the average gearing level has dropped to 32 per cent as at September 2010, as investors are more risk averse in this resurging market.
Lenders now also have to be clear about informing clients of the procedure and responsibility for margin call notification, a problem that saw many investors lose out big time in high profile crashes in the past.
Research house Canstar Cannex financial analyst Mitchell Watson says margin lending is still popular, despite its decline in popularity from 226,000 to 206,000 customers in the latter part of 2009.
"We saw opportunistic investors enter the market in 2009 to take advantage of the partial recovery but they have since exited, leaving behind long-term investors."
Margin loans allow people to borrow money to invest in shares or managed funds and then can claim the interest repayments as a tax deduction.
"Investors pay more for margin loans than they do for mortgages because lenders believe there is more risk attached to shares which, by their very nature, fluctuate in value all the time," Watson says
"Mortgages, on the other hand, are secured by property which is not nearly as volatile."
Borrowers pay between 9.24-9.8 per cent for a $50,000 margin loan, roughly 2 per cent higher than a mortgage.
Watson says people are more conservative now in the way in which they are borrowing within margin loans.
"Storm Financial highlighted the risks of margin lending and so it's been educational for people to understand these risks," he says.
"The debacle put margin loans in a bad light and over the past three quarters there has been a drop in lending."
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