What is a margin loan?
A margin loan lets you borrow money using the investments in your margin account as collateral. Unlike borrowing to buy more securities, a margin loan works more like a line of credit — you can use the funds however you see fit. It comes with some real advantages, like lower interest rates and flexible repayment, but it also carries risks that are worth understanding before you dive in.
What is a margin loan?
A margin loan is a type of borrowing that lets you withdraw cash from your brokerage account, using the investments you hold as collateral. It's different from buying on margin, which is a trading strategy where borrowed funds are used to purchase additional securities.
A margin loan (sometimes called a portfolio line of credit, or a secured line of credit) functions more like a line of credit — you can use the borrowed money at your own discretion, whether that's paying for home repairs, buying plane tickets, or covering other expenses. The investment assets in your margin account serve as the collateral for the loan.
Why would you opt for a margin loan over a more traditional credit product? There are a few reasons:
They typically come with lower interest rates than a standard line of credit or traditional loan.
They can often be quicker to access, because they don't require piles of additional paperwork or credit checks.
They don't have a prescribed repayment schedule (though the lender can demand repayment at any time).
While these are notable benefits, there are also important considerations to weigh before you start to withdraw funds.
How margin loans work
To access a margin loan, you first need a margin account with a brokerage. Opening one typically requires an application that involves providing more financial information than a standard cash account.
Once approved, your borrowing capacity depends on the value and type of investments in your account. Generally, you can borrow up to a percentage of your eligible securities — this is often referred to as your available margin or buying power. The specific percentage varies by security type and brokerage.
Repayment is flexible. There's no fixed schedule — you can pay back the loan at your own pace, either by depositing cash or selling securities. However, you'll be charged interest on the outstanding balance for as long as the loan remains active, and your brokerage can demand repayment at any time.
It's worth noting that as the value of your investments fluctuates, so does your borrowing capacity. If your holdings decline significantly, your available margin shrinks — and that's where margin calls come in.
Ways to use a margin loan
Unlike buying on margin (where borrowed funds must go toward purchasing securities), a margin loan can be used for a range of personal and financial needs. Some common uses include:
Real estate. Some investors use margin loans to cover a down payment or bridge a gap while waiting for other funds to come through, avoiding the need to sell investments and potentially trigger capital gains.
Large purchases. Whether it's a home renovation, a vehicle, or another significant expense, a margin loan can provide quick access to cash without the paperwork of a conventional loan.
Tax planning. A margin loan can help cover a tax bill without forcing a sale of investments at an inopportune time.
Short-term liquidity. If you need cash temporarily and expect incoming funds soon, a margin loan can serve as a bridge, letting you stay invested.
Keep in mind that using a margin loan for personal expenses means the interest you pay is generally not tax deductible.
Benefits of margin loans
Speed and convenience. If you have a margin account in good standing, it can be faster and simpler to access a margin loan than a traditional loan. Typically no additional forms, credit checks, or vetting are required.
Lower interest rates. The interest rate you pay on a margin loan will often be lower than what you'd pay on a conventional credit product. Rates can be particularly low for investors with large portfolios, since they have more collateral to secure the loan.
Flexible repayment. You can pay back a margin loan on your own schedule, so long as your account is in good standing.
Risks of margin loans
Margin calls. If the value of your investments (your collateral) dips below the margin requirement set by your brokerage, you'll face a margin call. When that happens, you'll need to sell assets in the account, deposit margin-eligible securities, or add cash. If you don't act within the timeframe required by your brokerage, they can sell off your assets — which may affect your investment strategy and force you to close positions you'd rather keep.
Complexity. Managing a margin loan is more involved than a traditional credit product. You need to understand investment principles, track market fluctuations, and regularly monitor your account.
Interest costs. Interest accrues on the outstanding balance for as long as the loan is active. If the loan stretches longer than expected, the cost can add up.
Buying on margin vs. margin loan
Buying on margin and a margin loan share some basic similarities and some key differences. Here's a quick overview:
Buying on margin | Margin loan | |
|---|---|---|
| Purpose | Purchase additional securities | Withdraw cash for any purpose |
| Collateral | Securities in your account | Securities in your account |
| Interest deductible? | May be, if investments earn income | Generally not, if used for personal expenses |
| Margin call risk | Yes | Yes |
Margin accounts
Whether you want to buy on margin to invest, or use a margin loan to borrow funds for other purposes, you need a margin account. Opening a margin account requires an application process, and brokerages will typically need more information or have higher requirements than what's needed to open other types of accounts.
Collateral
When you buy on margin, the securities in your account serve as collateral. When you sell your position, the brokerage will pay itself back the amount owed plus any interest charges before passing any balance to you.
When you withdraw funds from your margin account, you're also borrowing against the investments you hold at the brokerage. You repay the loan by either depositing cash or selling securities in your account.
In either scenario, how much you can borrow will vary based on the positions in your account. Generally, the amount you can borrow is equal to or similar to the buying power in your account.
Interest
Whether you buy on margin or withdraw from margin, you will be charged interest on the loan. The amount of interest you pay is based on the interest rate, the amount borrowed, and the length of time you borrow the money.
When you buy investment assets on margin in Canada, you can — for tax purposes — deduct the interest paid from the gains in your account, if the investments are earning investment income (paying interest or dividends). When you use a margin loan for personal expenses, loan interest is not tax deductible.
Margin calls
A margin account, no matter how it's used, requires you to maintain a certain level of equity (what's usually called the "maintenance margin"). If the equity in your account falls below the maintenance margin, your brokerage will issue a margin call. It's a requirement to fund your account, either by selling securities in the account or transferring cash or margin-eligible securities to your account.
In the case of margin loans, a margin call can occur when your borrowing exceeds your available margin balance.
In either scenario, if you don't bring your account balance up by the specified time frame determined by your brokerage, they may liquidate your securities.
Tips for managing a margin loan
Monitor your account regularly. Keep an eye on your margin balance and the value of your collateral, especially during volatile markets. A sudden drop in your portfolio could trigger a margin call.
Borrow conservatively. You can borrow up to your full available margin, but that doesn't mean you should. Keeping a buffer reduces the risk of a margin call if your holdings decline.
Have a repayment plan. While there's no fixed repayment schedule, interest accrues daily. The longer you carry the loan, the more it costs. Plan to repay within a reasonable timeframe.
Understand the tax implications. Interest on margin loans used for personal expenses is generally not tax deductible in Canada. If you're borrowing to invest, the interest may be deductible — consult a tax professional for your specific situation.
Is a margin loan right for you?
A margin loan can be an appealing way of accessing extra cash without selling your investments. But the complexity and potential risks mean that its use is generally suited to experienced investors who understand the mechanics — including how margin calls work and how market fluctuations can affect their borrowing capacity.
