Normally with an investment loan, the lender requires the value of the loan to be no more than a specified percentage of the investment. For example, at the start of a 2:1 leveraged investment worth $30,000, the loan is worth $20,000, or 2/3 of the investment, and your deposit is worth $10,000, or 1/3 of the investment.
If the investment drops in value, for example, to $25,000, the loan is still $20,000, but now represents a larger percentage of the investment – 80% in this case. If this happens, the lender will make a ‘margin call’, which is simply a request for you to deposit more money into the account to bring the loan back to the appropriate ratio.
In this example, you would be required to deposit $5,000 in order to bring the investment back to $30,000, so the loan again represents only 2/3 of the total $30,000 investment. If you don’t have the $5,000, you will be required to surrender the investment and pay off the loan.
Investors concerned about their ability to contribute more money into the account in the event of a decline in investment value should look for an investment loan that guarantees NO margin calls.
Companies, such as: Great-West Life – Solutions Banking and Manulife Bank provide loans with NO margin calls.