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Margin Loan Management

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 and that they should only be considered by investors who are able to deal with the risks associated with geared investing – and to be able to manage financially (and psychologically) when there are market turmoil events occurring. Whilst margin loans are a valid tool in wealth management strategies, the nature of the lending requires that investors geared in this way, particularly during downward trending market volatility, may be called on to add further asset support to the portfolio.

Since the change in the regulations during 2010, once the buffer between the agreed LVR and the maximum LVR has been absorbed by more than half the borrower will receive a ‘buffer alert’ communication from the lender.

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 emanate – and that may come at a time less convenient than might have been the case when the buffer alert communication was made.

From a margin loan management perspective in this post-2010 environment it is no longer acceptable to add funds just to get back into the buffer zone – a margin call now requires funds to be provided to fully restore the buffer position!

We suggest the following to all readers (and our clients will know that we proactively engage with them on these matters):

  1. if you receive a buffer alert, evaluate the situation (remembering that if your portfolio is in managed funds there will be a lag between market outcomes and unit price valuations) and if you have access to an adviser, contact them for guidance;
  2. if you have funds available – whether cash reserves or access to line of credit (where this is an advised strategy in your circumstances) – determine how much you can promptly pay to your margin loan account to keep it within buffer; and
  3. 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, whereas a buffer restoration need only be calculated according to expected market valuations – i.e., if markets are expected to affect your portfolio by 5%, then $9,500(1) will most 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.

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 our experienced planners through our website Contact Us facility and we will make arrangements with you.

(This post was originally published as an article in a Newsletter during August 2011: it has since been updated and occasionally refreshed, most recently in January 2019.)

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