A Margin Loan is a loan that uses shares or managed funds as security. You can start with existing investments or cash contribution, then borrow to expand your portfolio. Your portfolio is security for your loan, much the same as a house is security for an investment home loan.
Margin Calls occur when your equity falls below an agreed percentage of the loan (we lend up to a certain percentage against each security and look at the weighted average of all the security on the loan. We lend anywhere from 0% up to 75% and the weighted average of all your securities is the maximum we will lend, much like a home loan the bank will lend 80% of the total value of the home). We also provide a buffer of 5% over and above the maximum allowable borrowing (this is used for market fluctuations).
If the market value of the portfolio falls far enough, your portfolio’s lending value may fall below your current loan balance (we allow a 5% buffer of the market value of your portfolio), if your loan balance exceeds the lending value of your portfolio by more than the buffer, a Margin Call will be triggered.
Eg : Client contributes $30,000 cash and borrows $70,000, invests total $100,000 against shares that we lend a maximum of 70% against. Market value $100,000, lending value $70,000. Currently geared at 70%, maximum allowed 70%, Margin Call triggers at 75%. Market value falls to $90,000 therefore lending value falls to $63,000 (70% of $90,000). Currently geared at 77.77% ($70,000 loan balance/Market value $90,000).
Client has 3 options to clear a Margin Call :
• Deposit cash into the loan to reduce the loan balance back to the lending value.
• Provide additional security (shares or managed funds) to increase the portfolio value.
• Sell part of the portfolio and use the proceeds to reduce the loan balance.
By Brian Phelps, CommSec
The views expressed in this article are those of Brian Phelps, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814. Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814 is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 and a Participant of the ASX Group and the Sydney Futures Exchange. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice.
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