Margin loan management is an important matter that should be attended with a high level of consistency. In times of volatile market activity in the asset class acquired under the loan terms, particularly close monitoring is advisable.
Continuum Financial Planners Pty Ltd recognises that there are additional risks associated with margin loans. Accordingly, they should only be considered by investors who are able to deal with the risks associated with geared investments. They need to be able to manage financially (and psychologically) when market turmoil events occur. Whilst margin loans are a valid wealth management strategy tools. However, the nature of margin lending means that these investors are subject to adding further asset support to the portfolio. This likelihood of this occurring escalates during downward trending market volatility,
Margin Loan Management underwent change
Since the change in the regulations during 2010, a margin loan funded investor will receive a ‘buffer alert’ communication. This is required once the buffer between the agreed LVR and the maximum LVR reduces by more than half.
On receipt of such a message, action may be required to restore the buffer. At the least, a borrower in this situation needs to satisfy themselves that the matter is under control. If the situation deteriorates, it is likely that a margin call will be made. That call may come at a time less convenient than might have prevailed when the buffer alert communication was made.
From a margin loan management perspective, adding funds just to get back into the buffer zone is no longer acceptable. A margin call in the post-2010 environment requires funds to be provided to fully restore the buffer position!
Managing margin loan elements
We proactively engage with our margin loan clients to respond to alerts/ calls –
- if in receipt of a buffer alert, contact your adviser for guidance and evaluate the situation. (Remember that if your portfolio is in managed funds there is a lag between market outcomes and loan covenant valuations);
- if funds are available, determine how much you can move to your margin loan account to keep it within buffer. This could come from either:
- cash reserves or
- access to line of credit (where this is an advised strategy in your circumstances); and
- buffers are normally 10% of the value of the invested funds. On a $200,000 portfolio a margin call will be at least $20,000. A buffer restoration need only be calculated according to expected market valuations. Accordingly, if markets are expected to affect your portfolio by 5%, then $9,500(1) will likely avoid a margin call.
(1) this calculation is by way of example only: your portfolio calculations should be made on an individual account basis.
Our experienced team is available to assist
If you have any concerns in relation to these matters please contact your financial adviser. If you are not currently being serviced by a financial planner in relation to your margin loan, access the experienced planners at Continuum Financial Planners. An appointment can be made with them by –
phoning our office on 07-3421 3456, or
at your convenience, use the linked Make A Booking facility.
(This post was originally published by us in August 2011. It has occasionally been updated/ refreshed, most recently in January 2025.)
