Although there are many advantages with gearing an investment portfolio, there are also risks. It is important to be aware that while margin lending has the potential to magnify capital gains, it also has the potential to magnify capital losses.
Your margin lender will apply a gearing ratio (or LVR) to each investment you hold in your margin lending portfolio which determines the amount you may borrow against that investment. As the value of investments can fluctuate, lenders will generally apply a buffer (usually 10%) to allow for market movement. When this buffer is breached, or if there are changes to the gearing ratios then you may exceed the maximum gearing ratio for the loan and receive a
margin call.
The following examples from St George Margin Lending illustrate the effect of market changes on your investments
| Assumptions |
| Client equity |
$30,000 |
| Gearing ratio |
70% |
| Amount borrowed |
$70,000 |
| Borrowing limit |
$70,000 |
| Portfolio market value |
$100,000 |
| Amount borrowed as a % of market value |
70% |
| Buffer |
10% |
Example 1: Effect of a 5% fall in the value of your portfolio. In this scenario the amount borrowed as a percentage of market value is above the gearing ratio but remains within the 10% buffer.
| Within the buffer |
Initial portfolio value
|
$100,000 |
Current portfolio value
|
$95,000 |
Gearing ratio
|
70% |
Client equity
|
$25,000 |
Amount borrowed
|
$70,000 |
| Borrowing limit |
$66,500 |
| Amount borrowed as a % of market value |
73.68% |
Example 2: Effect of a 15% fall in the value of your portfolio. In this scenario, the market fall will trigger a margin call.
Margin call
|
Initial portfolio value
|
$100,000 |
Current portfolio value
|
$85,000 |
Gearing ratio
|
70% |
Client equity
|
$15,000 |
Amount borrowed
|
$70,000 |
| Borrowing limit |
$59,500 |
| Amount borrowed as a % of market value |
82.35% |
A margin loan may not suit every investor and potential investors should understand the risks involved when considering gearing. Click here for more on
managing margin calls and how to avoid them.
 | On balance - St George |
| Do less, make more - St George |
| Smoother, safer returns - St George |