What are the risks of borrowing to invest?
All investments are subject to risk. Some of the risks relating specifically to borrowing to invest include:
- Market movements - a drop in the value of the portfolio held as collateral against your margin loan may require you to reduce your gearing level* at short notice. This is known as a ‘margin call’.
- Interest rate movements - if interest rates rise, the overall costs of your investment may increase, potentially reducing your profits. Fixing your interest rate can help you avoid this risk.
- Reduced lending ratios - lending ratios for securities are reviewed regularly and may be reduced or removed at our discretion, even for securities you have purchased in the past. If this happens and you are impacted negatively, we will let you know as it can trigger a margin call.
- Increased losses - a geared strategy can multiply your investment returns, but it can also increase your losses if the market declines and your investments perform poorly...
*Gearing level is your loan amount divided by the value of your accepted investment/s (the securities held in your portfolio that we use to calculate how much you can borrow), expressed as a percentage.
