While using your bank or stockbroker might be the most convenient, it’s likely there will be better and cheaper deals elsewhere so shop around. Here are some of the differentiators to consider in choosing your margin loan provider:
Check the shares or managed funds you are looking to purchase are on your margin lender’s approved list
In a similar way to a home loan provider wanting to avoid lending on a property in a bad state of repair. Margin lenders shy away from volatile/risky shares or managed funds and whilst most of the major shares and managed funds are included within all margin lender’s approved lists, not all shares and managed funds are included and you may find some significant differences in the list of approved investments from one lender to another.
Margin lenders typically look to avoid hugely risky shares; after all, they want to avoid a margin call forcing you to sell some of your shares or managed funds as much as you do. They only make money from you maintaining a margin loan not cashing it in.
Maximum Loan to Value Ratios (LVRs) differ
Again, in the same way different mortgage lenders are willing to offer higher/lower maximum LVRs based on different properties (e.g. commercial vs residential), Margin lenders offer different LVRs based on the shares or managed funds you’re looking to buy. If you are looking to borrow the maximum amount, be aware that this can differ by as much as 15% depending on the margin lender. Shopping around can be one of the easiest ways of increasing the maximum amount you can borrow.
Margin loans with higher LVRs are likely to charge you a higher rate
Lenders offering a higher LVR are more likely to compensate this additional with a higher rate.
Switching can save you $$$$$$!
So, if you have a low LVR and don’t intend on borrowing to the hilt, why use a margin lender charging a higher rate of interest, shop around and get yourself a lower interest rate.
Establishment, transaction and early termination fees
Generally, there are no establishment fees for individuals. However, for companies and trusts establishment fees typically range from $100-$250 to cover search and registration expenses.
Some lenders also charge a fee for each transaction through the margin loan or for transactions over a set limit. If you happen to cancel your loan within the first 3, 6 or 12 months of taking out the loan then further fees may apply. If you’re a frequent trader these costs can become quite considerable and you may find an alternative provider with low/reduced transaction costs more appropriate.
Fixed versus variable interest rate margin loans
Variable interest rate margin loans are available all year round, and are usually 0.7%-1.5% above the standard variable home loan interest rate. However, some margin lenders also offer fixed rates for a set period of time and this can be a great way of securing your payments if you are concerned about rises in interest rates.
Range of stockbrokers
While there is generally no restriction on which full service broker you use. Some margin lenders have restrictions on the range of online discount brokers you can use or your broker may charge an additional fee for using a 3rd party margin lender. This can have an indirect impact on the charges you’re paying, since one online broker may be charging you up to $50 per trade versus $25 per trade with another broker. Remember, you’re not limited to staying with your lender, products are constantly evolving and the best lender 2/3 years ago may not be the best lender today.