Margin Loan Interest Rates
Editor
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Margin loan interest rates are generally much higher than for residential and commercial property loans, as such it pays to shop around before picking a margin loan provider.
When choosing a margin loan provider you should of course consider things other than just interest rates; such as, what kind of loan-to-valuation (LVR) ratio you can borrow to on different shares, what the minimum loan balance is, what kind of securities you can trade in, any research and data services you can access, whether they offer live share price information, how reliable their trading platform is, whether funds sitting in your account are covered by the $250,000 Australian Government Guarantee and what their brokerage costs are.
For the purposes of this blog post though, we will be focusing on margin loan interest rates.
When using margin loans to invest in shares we also generally prefer to use variable rate loans rather than fixed rate loans due to the risk of margin calls and the potential break fees involved in the early termination of a fixed rate loan.
As of the date of this post here is a list of the margin loan variable interest rates available from some of the major online brokers:
CBA (Commsec Margin Lending) – 7.63% p.a.
WBC (BT Margin Lending) – 7.67% p.a.
ANZ (ANZ Investment Lending) – 7.84% p.a.
NAB (NAB Equity Lending) – 7.65% p.a.
As you can see, at face value the rates available from the four major banks’ brokerage sites are all fairly similar, but on closer investigation you will find that NAB Equity Lending are offering a 1% discount off their advertised variable rate if you re-finance an existing margin loan to them.
So at present you can get a rate as low as 6.65% p.a. from them for margin loans <$250,000* (and as low as 6.15% p.a. for margin loans >$1,000,000).
The effective interest rate you pay on the margin loan may be much lower than this though if you factor in the “redraw” or “offset” features of margin loan accounts.
Many brokers allow you to deposit cash and dividend payments directly into your margin loan account (or into an attached offset account), which effectively reduces the interest you have to pay on the outstanding loan balance.
This is similar to the redraw facilities or offset accounts associated with home and investment property loans.
For instance, if you had a margin loan of $100,000 at 6.65% p.a. you would pay $6650 (ie. 0.0665 x 100000) in interest.
But if you had cash and dividends totalling $20,000 sitting in the margin loan account (or offset account), you would pay interest on the reduced effective loan balance of $80,000 (ie. 100000 – 80000), so at 6.65% p.a. this is $5320 (i.e. 0.0665 x 80000) – this works out to be an effective interest rate of just 5.32% p.a. (ie. 5320/100000 x 100).
In practice of course the value of the cash and dividends sitting in the margin loan account (or offset account) will fluctuate, and margin loan interest incurred will also have to be paid, but this example illustrates the basic concept of the effective use of margin loan accounts to reduce the effective interest paid.
And note that if you do use your margin loan account with a redraw-like facility (and not with an offset account), you need to make sure any funds later withdrawn from the margin loan account are used for business or investment purposes only in order for the interest incurred to remain fully tax-deductible (though there are some exceptions to this if you are using a trust structure – we will discuss this in a future blog post).
As mentioned before, the interest rate alone shouldn’t be the only deciding factor in using or switching to a particular margin loan provider.
In any case you can always mention this rate to your existing broker and see if they are willing to match it (or better it!), and therefore avoid yourself the hassle of changing brokers and doing a new margin loan application.
Another thing to consider when choosing a margin loan provider is which bank you have any other loans with, i.e. home loan or investment property loans – e.g. if these loans are all already with NAB, then it may be prudent to diversify your loan portfolio between different lenders and have any margin loans with a different lender.
Alternatively, by having all of your loans with the one bank – both property loans and margin loans – you may be able to negotiate higher interest rate discounts off all loans, but this may backfire on you if the bank changes its lending policy and decides you have too much loan exposure and they don’t want to lend any more money to you!
*Disclaimer: We do not use NAB Equity Lending ourselves.
Editor - October 16, 2013, 8:50 AM
There is also an Australian stockbroking company called Capital 19 that was offering margin loan rates of 5% for loans < $100k, 4.5% for loans $100k-1M, and 4% for loans >$1M – they were doing this through Interactive Brokers (an American stockbroking company).
But the shares in this setup are held using a “custodian”, so they are not actually held in your name.
Therefore this does pose a risk to you if the brokerage company goes bust, although there are some insurances the company has that may cover you to some extent if this were to happen.
In any case, due to some licensing issues Interactive Brokers currently has with ASIC (Australian Securities and Investments Commission), they have stopped offering these margin loans to Australian customers.
There is an active thread on Aussie Stock Forums for those looking for more updated information about this.
Editor - November 10, 2013, 5:36 PM
We’ve also recently found out that there are some Australian-based investment banks that will offer very low margin loan interest rates (eg. 4-5%) and use similar “custodial” structures to Interactive Brokers, however, they tend to be accessible only to investors with over $1M to invest or who meet the requirements to be called a “sophisticated investor”.
iwannaberich - February 28, 2014, 12:49 PM
Can you tell me which lenders provide an offset account for a margin loan? This would be very useful to me. Atm I am with Westpac (BT) at a rate of 6.47% which I managed to get after quoting a Commsec discount offer. Interestingly commsec have sent me an email for a rate of 6.38% for a year.
Definitely possible to get lower rates if you negotiate. Still we are being ripped off, the risks of banks losing money are very low, we should be paying 5% the same as with home loans. I doubt the banks would have lost much if any money on margin loans during the GFC with the buffers that are in place.
Editor - February 28, 2014, 4:35 PM
Hi iwannaberich,
Thanks for being the very first person to comment on our blog!
Most of the accounts I have come across so far seem to operate similar to home loan “redraw” accounts or “line of credits”, but Macquarie Prime has one which to me appears effectively like an offset account and maybe worth investigating further (you’d need to read their PDS for more details though) – they are calling them “deposit sub-accounts” I believe.
6.47% is a very good rate, though I think in the current market it maybe possible to go even lower.
From my recent discussions with other investors it seems like ANZ E*Trade and UBS are being a bit more aggressive with their discounting at present depending on your loan amount, and low 6% rates maybe achievable, or even lower for very large loan amounts.
Still, it’s very hard to beat the rates offered by Interactive Brokers (now 3-4%, and for companies and trusts only, ie. not offered for personal names anymore) – I might have to re-consider this…
Thanks again for your comment!
iwannaberich - February 28, 2014, 4:53 PM
Thanks for that, I’ll look into the Mac Prime account.
I used to be with Interactive Brokers until the restrictions came. Not only from the Australian side but also the SEC was not allowing margin on foreign securities with a market cap of less than $500m. Also the strict margin requirements that IB have.
Too bad all these margin loan providers don’t advertise their lower rates so we can get some real competition in the market.
Editor - February 28, 2014, 5:07 PM
I wasn’t aware the SEC had such restrictions on small caps.
With the margin requirements for IB, were you able to go to 70-75% LVR on large caps like the big 4 banks, WOW, WES, TLS etc… ?
Or were the LVR’s much lower than this?
It would be better if real rates were more transparent, there are plenty of people paying 7.8%+ thinking that this is the norm with margin lending.
iwannaberich - February 28, 2014, 5:23 PM
Just had a look at the Mac Prime prospectus and their deposit sub account does not appear to work quite like a mortgage offset account. The loan is automatically drawn down or repaid based on the value of your shares so any withdrawal for non investment purposes would affect the deductibility of interest.
The limit of $250m was brought in a couple years ago and then was changed to $500m last year. We got one day’s notice as well before the margin requirement was going to be raised to 100%, ie 0% LVR. I’m not sure if they actually liquidated your holdings automatically since I took care of the issue myself, but I’ve read some horror stories about IB doing this. When the Australian restrictions got put in, we were allowed to keep existing margin arrangements, just not open new positions so that was handled a lot better.
As for LVR, the maximum allowed was 50% LVR with margin calls happening at 75% LVR for all stocks where full margin was offered. Sometimes stocks would get their margins reduced so would be 0% LVR with margin calls happening at 50% LVR or would get reduced all the way with margin calls at 0% LVR. There was never really much notice provided either.
iwannaberich - February 28, 2014, 5:30 PM
How have people been able to get the low 6% rates from Etrade and UBS. I don’t really want to change but it would be good to negotiate BT down. If it was an actual advertised offer, things would be a lot easier.
Editor - February 28, 2014, 6:05 PM
Ok fair enough re. Mac Prime, I only had a cursory look at the PDS as they wouldn’t move on their advertised rate much for me.
Regarding the deductibility issue, using a trust may help you get around this, but will cost you a bit more in annual accounting fees (you would need to speak to an accountant about this though).
IB sounds way too stressful for me when you put it that way!
For low 6% rates and below, you really need a several hundred thousand dollar margin loan balance (eg. 400-500k) to get them to move as I understand – there’s no advertised rate as such to compare with.
I think you just have to pose the question to them so it’s a bit hit and miss as to whether this is likely to succeed.
It might still be worth a shot with a lower balance, but no real guarantee of success.
I haven’t done this myself yet (I’m still at 6.65% with my current broker) – and changing brokers is particularly inconvenient with a trust involved as all documents need to be certified.
iwannaberich - February 28, 2014, 6:20 PM
Yes, IB is really only suitable for people who want to hold large cap stocks with conservative levels of margin. Or somebody who trades a lot as their brokerage rates are also very good, especially for overseas shares.
My loan balance is no where near that much so I think I’m doing pretty well with my current rate. Have just emailed BT to see if they will match the Commsec offer for me.
As June approaches there might be some good fixed loan offers, might see some starting with a 5.
Editor - February 28, 2014, 8:15 PM
Sounds like a good plan.
Yeah might be worth keeping an eye on fixed rates.
Will post back here for any interest rate updates I hear of.
Appreciate your input.
Editor - May 5, 2014, 12:38 PM
Well Westpac have recently upped the ante and are now offering a 5.95% variable rate for margin lending on ASX100 stocks, and with loan amounts of <250k.
So sub-6% rates are not out of reach for smaller investors.
Editor - May 11, 2014, 6:48 PM
Speaking to the margin lending section of an investment bank recently (UBS) they said that if using them as your broker any shares you have would actually be held in the name of a bare trust on behalf of you, ie. with you as a beneficiary of the bare trust.
And with the bare trust being a “non-operating trust”, such that if UBS or any of its entities were to fold the bare trust would stay intact along with all client funds.
This structure seems like it may be a bit similar to the way US brokers like Interactive Brokers operate, though very different of course to having the shares held directly in your own name (or own entity), and seems to allow them to offer lower margin loan interest rates than other brokers