Margin Loans toolkit - % decline before margin call

Hi, I have just registered as a member, although I have been reading InvestEd for a while since I invested in the Navra Australian funds. Found InvestEd to be very informative and useful.

Previously I have not had access to Margin loan spreadsheet in the Toolkit section. However I have just tried it and believe it is incorrect in respect of how BT Margin Lending offers a 10% buffer.

The InvestEd toolkit margin loans spreadsheet assumes a 10% buffer is a 10% increase on the loan available at your Maximum gearing ratio (MGR). However on the BT web site under Margin Lending calculators they have what they call a 'Transaction Simulator', and it is a very educational margin loan calculator.

BT is my margin lender, but you don't need to be signed into a BT account to use it (when you are signed in, it brings up your current position prior to any simulations). Anyone can use the simulator, eg; to build a position by repayment (deposits) and purchases and then click on the percent decline caption.

It clearly shows that if your LVR is 70% with a 70% MGR your holdings will need to decline by 13% to trigger a margin call. Then applying a minus 13% decline in value to holdings, it shows the loan has gone to 80.4% the value of holdings and a magin call of 0.4% is now active, ie; the 10% buffer allows your loan to go to 80% of your holdings value, not 77% (10% increase on 70%) as shown in the InvestEd spreadsheet.

Thus the BTML 10% buffer appears to allow a 10% decline in equity rather than a 10% loan increase, a nice little extra buffer equating to a 13% decline in holdings in the above example.

Cheers

Thanks tasmo - I'll have to confirm with Leveraged Equities (who I use) how they actually calculate it. I might have to redo the spreadsheet. At least I didn't overstate it

(PS. I moved your post to a new thread)

Hi Sim,
Raises an interesting question for myself, as I assumed all lenders calculated buffers in same manner. Now I have just refinanced with St George Margin Lending who also offer 10% buffer, but they don't have the neat transaction simulator that BTML has.

Cheers,

tasmo

I've already started planning to build a full margin loan simulator for invested - and it would be useful to work out how each of the margin lenders actually calculate these things to make it more accurate.

Hi Sim,
An article today by Simon Hoyle SMH provides a simple formula for calculating percentage fall in your portfolio which will trigger a margin call. I have compared results to BTML simulator and results match.

"Margin Call Trigger (% decline) = 100[1-(AVR/(LVR+B))] where AVR is your actual loan-to-valuation ratio, the LVR is the maximum allowed loan-to-valuation ratio, and B is the so-called "buffer" (a "grey area" that allows your debt to temporarily exceed the maximum LVR)."


( http://www.smh.com.au/news/business/...815313846.html )

Cheers