How margin loans work
A margin loan lets you borrow against existing shares (or cash) to buy more shares — leveraging your equity to take a larger position. The maths: with $50,000 of own equity and a 50% LVR target, you borrow $50,000 to take a $100,000 portfolio. If the portfolio earns 7% gross ($7,000) and the loan costs 8.5% ($4,250), your net annual return is $2,750 on $50,000 of own equity = 5.5% — slightly below the unleveraged 7%. Leverage works in both directions; small return shifts produce outsized changes in leveraged equity returns.
The danger is the margin call. If portfolio prices fall and your LVR rises above the lender's maximum (typically 75-80% on individual stocks, 70% on diversified portfolios), you receive a margin call requiring you to either deposit cash, sell positions, or have positions force-liquidated within 24-48 hours. Sharp market drops in March 2020 (-30% in weeks) and September 2008 (-50% over a year) triggered tens of thousands of forced-liquidation margin calls in Australia, often crystallising losses at the worst possible time.
Margin loan interest is generally tax-deductible against investment income (standard ATO rules apply). The deductibility provides a tailwind that means margin loans can outperform unleveraged investing if returns exceed the AFTER-TAX cost of borrowing. At a 30% marginal rate, an 8.5% margin rate becomes effectively 5.95% after deductibility — a meaningfully lower hurdle. Conservative LVRs (30-50%) and diversified holdings (broad ETFs vs single stocks) materially reduce margin-call risk. For broader investment-strategy comparison, see our DCA Calculator.