Interest rate rises hit market investors

Investors will need increased returns in order to cover the cost of their margin loans if they are to minimise losses on the share market.

Cannex financial analyst Frank Lopez said margin loans, as with other Australian lending products, haven’t escaped the recent round of interest rate rises.

“Investors now need a bigger return in order to make a profit after factoring in the rising cost of borrowing,” he said.

“This is not an easy call in this unpredictable market.”

According to Lopez, margin lenders are now charging interest on standard loans at over 10 per cent on a portfolio with 50 per cent gearing, which means investments have to grow by at least 5 per cent just to recoup interest payments.

“In a bull market this is all well and good, as shares often make large percentage gains through the course of a year,” he said.

“Under current market conditions though, it has to be a very significant factor when weighing up whether to go into, or increase your participation in, margin lending.”

Lopez said this shows that margin loans are used by investors for long rather than short-term gains and that for many, riding out market turmoil is their only option, but others who can’t risk a further downside hit may well opt for a protected loan as a damage limitation strategy.

“Protected loans guarantee a ceiling on maximum losses. Naturally, their interest rates are higher, but we are seeing more investors taking out protected loans for peace of mind,” Lopez said.