Younger investors seize the opportunity

Margin loans have the potential to serve a dual role for younger investors. It’s a way to develop a personal credit history while also building wealth outside the property market.

“It may be that margin lending becomes a preferred investment strategy for those who don’t want to be tied down to a property right away,” says Leveraged’s Lily Elliott. “It’s an option that could suit younger people as they establish a career – rent where you love, invest in liquid assets, and manage them from anywhere in the world. We may well see more of this in the coming years as mortgages become increasingly out of reach for some.”

Andrea Shipley*, 26, is one of the growing number of millennials rethinking their approach to building a first home deposit. Rather than steadily tucking cash into a savings account, she is using gearing to turbocharge a share portfolio. And according to Shipley, the process has delivered benefits that extend beyond investment growth.

“I’m not averse to the idea of taking out a huge mortgage to buy a home,” she says. “What I am against is the opportunity cost of growing a deposit in a savings account paying almost no interest when I could earn double-digit returns on the sharemarket.”

Shipley took out a NAB Equity Builder loan in early 2020 to set up a portfolio of listed securities. “One of the pluses of the loan is that it only lets you borrow against managed funds, listed investment companies and ETFs. So you have the benefit of diversification from the start.

“The loan rate is 3.75% interest, which is incredibly cheap, and there are no margin calls. That was important as I really didn’t want to be told I’d have to put up a few thousand dollars if the market moved against me.”

Despite the sharemarket tanking just weeks after taking out the loan, Shipley benefited from the upswing that followed. Buoyed by this success, she later took out a margin loan with trading platform eToro, investing in $5000 worth of US tech stocks using $1000 of her own money. That venture wasn’t such a winner.

“The eToro loan doesn’t come with margin calls,” she says. “But it does have a built-in stop-loss mechanism. When the NASDAQ [the US tech market index] dropped in November 2020, the shares were automatically sold. I’d be hesitant to use this type of loan again.”

Despite the mix of gains and losses, Shipley feels using debt to invest has been a valuable learning experience.

“Margin trading has helped me acclimatise to using debt and find my own comfort levels around personal debt. It’s not just about building a home-buying deposit. My portfolio has become an investment in its own right – one where the capital growth rate is well in excess of the rate I’m paying.”

*Not her real name.