Margin lending can be a very effective way of boosting your investment portfolio if you have a limited amount of capital.  It allows you to boost your investment power, giving you the potential for higher gains. The flip side of that though is it can increase your losses as well as hitting you with interest and other fees.

In order to obtain a margin loan, you need to provide security, as you do when obtaining a home loan. This security can be in the form of cash, securities or some managed funds. A lender will apply a loan to value ratio (LVR) to each security, allowing you to only borrow as much as the market value of that share times the LVR.  E.g. if BHP had a LVR of 75%, and you had $10,000 worth of BHP shares, then you could borrow $7,500 against that.

The other main issue with margin loans is the danger of getting a margin call. If the price of your share goes down, bringing your LVR above the approved threshold, then the lender will insist that you either sell some shares or pay down part of the loan immediately to bring it back into line.

To assist with analysing the benefits of margin lending and how it could affect you, I have posted a spreadsheet on our site which will compare a portfolio with a loan with a portfolio without a loan, so feel free to check it out.

Note that this spreadsheet is a guide only, and there are various other things to consider when obtaining a margin loan, so if your keen on the idea of increasing your investment power, make sure you do your research first!