Introduction to margin lending

What is margin lending?


Sometimes, investors use part of their portfolios as collateral to borrow money. The credit they access by doing so is known as “margin”, while the practice itself is referred to as “lending”. Investors typically borrow money in this way in order to meet short-term liquidity needs. 

You might consider such loans as a cost-effective and flexible way to manage your cash flow or obtain liquidity to diversify your liquid and/or illiquid portfolio. Using margin can also help enhance your returns, or keep your investment strategy on track when unexpected expenses threatens to throw it into disarray.  

But margin lending comes with significant risks. The higher leverage of your portfolio also means that any losses will be magnified in a downturn – and you may be forced to liquidate your assets at an inopportune time if markets move against you.   

“Margin lending is for investors with sufficient risk tolerance, knowledge, and experience, as the investor needs to weigh and consider factors including their financial reserves, market risk, interest rate risk, and tax consequences from the sale of collateral assets. 

Typically, margin lending is utilized for short-term borrowing needs, such as debt refinancing/consolidation, real estate acquisitions and bridge loans, unexpected expenses, business expansion, lifestyle/luxury purchases, purchasing investments, and more. An investor may also use margin lending as a means to achieve a desired estate planning goal or tax efficient strategy.”

 – Jason Britton, Margin Lending Transactor at Citi Private Bank


How it works


There are two main types of margin loans: purpose loans and non-purpose loans. The former’s proceeds can be used to purchase securities, which may then themselves form part of the collateral pool. Non-purpose loans can be used for other personal and business needs – but they specifically prevent you from using the money to purchase additional securities. 

With both loans, you’ll need to maintain a “minimum margin” amount of collateral in your account, typically stated as a percentage of the loan. If the value of your collateral falls below this minimum level, a “margin call” will be triggered. This requires you to top up your collateral urgently to meet your minimum margin by depositing eligible collateral or partially repaying to loan – failing which you may have to repay all of the loan immediately.

Generally speaking, your ability to borrow in this way (and at what rate of interest) will depend on your financial position, including the value and types of assets in your portfolio. Interest rates will also vary depending on whether your loan is full-recourse, limited-recourse, or non-recourse. A full-recourse loan can offer a lower rate, since it involves you personally guaranteeing full repayment of the loan – with the potential for claims against other assets beyond your portfolio in the event you default.         


Important considerations


There are a number of factors to bear in mind when considering whether this form of financing is suitable for you. Crucially, not all assets, securities, bonds or portfolios are acceptable as collateral. Most lenders will allow you to borrow against assets such as stocks, bonds, mutual funds, ETFs, structured notes, and hedge funds – but other investments may be relied upon less favorably. The quality of your assets, bonds, securities or a portfolio will affect the loanable value.

The higher your portfolio’s volatility, meanwhile, the less appropriate it is for use as collateral. Collateral with high volatility is more likely to trigger a margin call, increasing the risk that you’ll have to liquidate your portfolio at an inopportune time in order to raise funds to satisfy a margin call. 

If you’re in need of a relatively large amount of money for a relatively short period, however, then margin lending could be a good option. Similarly, if you tend to buy and sell assets frequently and have a high tolerance for risk, then trading “on margin” may be suitable– much more so than for an investor with a long-term “buy and hold” strategy.  



Margin lending is how an investor uses their portfolio as collateral to unlock liquidity, either to make further investments or for other purposes.

Your ability to obtain a margin loan and the interest you pay will depend on the composition of your portfolio, as well as whether you’re willing to offer other assets as collateral.

Such loans are particularly suitable for investors with various liquidity needs across relatively short investment holding periods.