Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 48

The decline of margin lending

One of the features of the equity market bull run into 2007 was rapid growth in margin lending. Between January 2000 and September 2007, the total amount of outstanding margin loans in Australia grew from around $6 billion to over $40 billion. While this still did not represent a large fraction of the total capitalisation of the Australian market (around 3% of the total in 2007), it was a significant development for the retail end of the market.

When the equity market plunged during the GFC, so too did the volume of margin lending. In March 2009, total margin lending had shrunk to around $20 billion.

This makes intuitive sense. With the value of collateral sharply diminished, and confidence at reduced levels, it’s no surprise that margin lending levels fell sharply. What’s more interesting is what has happened since then.

As the chart below shows, since the bottom of the market in March 2009, equities have made good headway. While still not at pre-GFC levels, they have delivered healthy returns in recent years. Total margin lending, however, has continued to slide towards $10 billion, even as confidence has been returning to the market.

Chart 1. ASX200 and total margin loans outstanding

To our way of thinking, this is a healthy development. Some reasons to be wary of margin lending include:

  • it tends to be an expensive form of funding. Margin lending only benefits the investor where the return on the equities exceeds the cost of the debt. With the long run average return on equities running at perhaps 11% per annum, there isn’t much room left after paying interest rates close to 8% 
  • this benefit disappears altogether if margin calls force you to sell at the wrong time. After a significant fall in share prices, the most successful investors tend to be the ones buying. Often, they are buying from margin borrowers, who have no choice but to sell 
  • debt funding of any sort tends to bring with it sleepless nights. A cool head is a prerequisite to good investment decisions, and when things get challenging, high levels of debt are a menace to good order.

At Montgomery, we sit in the far corner of the room. We use no leverage, and usually have a material part of our funds sitting in cash. We also avoid investing in companies that have material debt on their balance sheets. This absence of leverage helps foster a steady approach to our decision-making when market conditions become challenging, as they often do.

It is unlikely we will change our attitude towards debt any time soon, but if we were to wake up one day and decide that some leverage would be good, it is unlikely to be a margin loan.

It will be interesting to see what happens to the margin lending industry from here. We expect that having learned some of the above lessons the hard way, investors who do gear into shares are increasingly doing so by borrowing against residential property. Provided gearing levels are kept to prudent levels, this type of borrowing is likely to deliver a much better experience for borrowers. Nevertheless, if markets continue to rise, it is likely that investors will become more adventurous and margin lending may return, with its higher cost of borrowing.

Over time, of course, a new generation of investors will emerge. Without the benefit of first-hand experience of the GFC, they may embrace margin lending as a shortcut to wealth. When that happens, we will be checking our valuations closely, probably starting to count the rows to the nearest exit.

This cautious approach will no doubt cause some investors to miss out on heady gains. However, patience is a great virtue in investing. On the road to wealth there are many shortcuts that offer themselves to the unwary, and for long-term investors, it’s wise to think carefully about these shortcuts, or avoid them altogether.

 

Roger Montgomery is the founder and Chief Investment Officer at The Montgomery Fund, and author of the bestseller 'Value.able'

 

RELATED ARTICLES

Duh! Of course geared funds won, but know the risks

Mortgage funds: if only we had a trendier name, like P2P

Financial leverage in real estate: friend or foe?

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Superannuation

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Economy

Should Australia follow Trump's new brand of capitalism?

A new brand of capitalism may be emerging - one where governments take equity in private companies. Is it state overreach, or a smarter way to fund public goods without raising taxes?

Gold

Why gold may keep rising - and what could stop it

Central banks are buying, Asia’s investing, and gold’s going digital. The World Gold Council CEO reveals the structural shifts transforming the gold market - and the one economic wildcard that could change everything. 

Investment strategies

Fact, fiction and fission: The future of nuclear energy

Nuclear power is back in the spotlight, including in Australia. For investors exploring the sector, here are four key factors to consider in this evolving energy landscape. 

Taxation

The myth of Australia’s high corporate tax rate

Australia’s corporate tax rate is widely seen as a growth-killing burden. But for most local investors, it’s a mirage - erased by dividend imputation. So why is it still shaping national policy? 

Taxation

Should we change the company tax rate?

The headline 30% corporate tax rate masks a complex system of dividend imputation and franking credits that ensures Australian shareholders are taxed only once, challenging traditional measures of tax competitiveness. 

Investing

Noise cancelling for investors

A lot of the information at an investor's fingertips today has little long-term value. The modern investing greats are not united by access to faster information, but by their ability to filter out what doesn’t matter.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.