Here you will find information about:
- What are the risks of margin lending?
- Margin calls explained
- What do I need to do to rectify a margin call?
- Ways to reduce your margin lending risk
- Buffer Zones
What are the risks of margin lending?
The most common risks are outlined below.
Market volatility, margin calls and the risk of losing assets
If the market declines, so will the value of your portfolio. It may fall to a value where it no longer provides adequate security for your margin loan.
As the value of your security portfolio falls, this in turn reduces your borrowing limit. This in turn will cause a rise in your gearing level, as your loan balance has not changed. A margin call will occur when your loan balance exceeds the borrowing limit by more than the buffer.
You also need to be aware that a margin loan is a “full recourse” loan. This means that even if the value of your security portfolio falls to zero, you are still liable to repay the total loan balance outstanding. This means that you may need to sell other assets you have to clear the outstanding debt.
LVR Changes
The LVRs which are applicable on your security portfolio are subject to change at any time and may also be reduced to zero. This will affect your borrowing limit and may result in a margin call depending on your gearing level.
Interest rate changes
Variable interest rates are subject to change at any time. In a rising interest rate market, your monthly interest costs will also increase. The interest expense on your loan balance may exceed the distributions/dividends you earn on your investments and unless you have an adequate alternate source of income to fund the interest costs, a margin call may occur.
Changes to dividend payments
The timing of dividend and distribution payments may not coincide with your interest payments. Also, these payments that you may be relying on to assist with servicing your interest costs, may reduce or not be paid at all. In these instances, you need to ensure that you have an alternate source of income that can assist with servicing your monthly interest.
Geared equity
If the equity you have provided on your margin loan has been borrowed from another source, your overall gearing level will be higher. The higher the overall gearing level, the greater the effect that any fall in the value of your securities will have on your financial situation.
Taxation laws
Tax laws are complex and may change over time, possibly with retrospective application. You should seek the advice of an independent tax adviser on the tax consequences and impacts of entering into a Direct Margin Loan Facility.
Margin Calls Explained
A margin call occurs when your current loan balance exceeds your borrowing limits plus your buffer. While we provide a buffer to accommodate market fluctuations above your borrowing limit, for example when the value of your security falls, if the amount outstanding exceeds the borrowing limit by more than the buffer you will be in a margin call. If this occurs you must take action to rectify the margin call (normally by 2.30 pm Sydney time on the next business day after your loan has moved into a margin call).
What do I need to do to rectify a margin call?
You can rectify a margin call in 2 steps:
Step 1: Determine which of the following 3 options, or a combination thereof you wish to take to meet the margin call:
Option 1: Deposit cash to the value of the margin call into your loan account.
You can do this by electronic transfer to the following Direct Margin Lending account, direct deposit to your Cash Management Account (CMA) or via BPAY®.
Electronic Transfer
Bank: St.George Bank
BSB: 332 –096
Account: 599000006
Account Name: St.George Margin Lending
Important: - Reference: You must include your Client Reference Number
If you have a linked CMA
Either a direct deposit into your CMA or:
Deposit cash into your CMA using BPAY®:
Biller Code: 162008
Biller name: St.George Margin Lending
Reference: Your CMA Account Number
Option 2: Transfer additional approved securities to increase your security value.
You need to transfer enough security to restore your amount outstanding to your borrowing limit or below. This can be determined by dividing the margin call cash amount by the loan to value ratio of the security you wish to transfer:
Value of security to transfer = margin call cash amount / LVR of security to transfer
Option 3: Sell sufficient quantities of your portfolio and use the proceeds to reduce the loan balance to within the borrowing limit.
This can be determined by dividing the margin call amount by 1 minus the LVR of the security you wish to sell:
Value of security to sell = margin call cash amount / (1 – LVR of security to sell)
Step 2: Notify Direct Margin Lending that a margin call has been met
Please ensure that you notify us of any action in relation to a margin call prior to the time given to meet the margin call (normally 2:30pm Sydney time the business day after you have received a margin call). You can do this by:
- Calling 1300 300 128 8.00am–6.00pm Monday to Friday and speaking with one of our Account Managers or;
- E-mailing us at directmarginlending@stgeorge.com.au including details of your account name and number and what action you have taken to restore your position
- Faxing us on 1300 768 894 or Int’l fax +61 2 9995 8280 including details of your account name and number and what action you have taken to restore your position
Please note:
If you are unable to rectify a margin call Direct Margin Lending may sell enough security to restore your loan balance to your borrowing limit. We may be required to sell your security even if we were unable to contact you or your adviser or we were not notified that a margin call had been rectified. It is also important to note that once in margin call the margin call can only be rectified through the steps outlined above.
Margin Call Example
Example: John has a Margin call for $2,000. In order to rectify the margin call he can:
- Deposit $2,000 to the loan, or;
- Sell shares* at a rate of 1/(1-LVR) multiplied by the Margin Call amount. For example, John can choose to sell his BHP shares, which have a loan to value ratio of 75%. This means that he would need to sell 1/(1-.75) x 2000 = $8,000 worth of BHP shares, or;
- Transfer shares* equal to the value of the margin call amount divided by the loan to value ratio of the shares. In John’s case he would need to transfer $2,000/.75 = $2,667 of BHP shares
For assistance in calculating how you can meet a margin call please refer to our online simulator available when you log into your online margin lending account.
* Shares must be included as part of the Direct Margin Lending Acceptable Securities List available on Internet Account Access or by calling our Account Management Team on 1300 300 128 8.00am – 6.00pm (Sydney time) Monday to Friday
Ways to Reduce your Margin Lending Risk
- It’s your responsibility to monitor your facility to avoid a margin call. Log on to Internet Account Access regularly to monitor your portfolio and loan
- Hold a diversified portfolio across a broad range of sectors
- Reinvest any investment income back into your loan and make regular interest payments
- Ensure your investment time frame is long-term, ideally greater than 5 years
- Get advice from a qualified adviser if you are not confident managing your own portfolio
- Take action when you are approaching buffer rather than wait for a margin call
Buffer Zones
To help protect you from fluctuations in the share market that could result in a margin call the following buffers are currently 'built-in' to the value of your investment:
- 5% for shares with an LVR of more than 75%
- 10% for shares with an LVR of 75% or less
- 10% for managed funds
It is expected that whilst you are in buffer you take action to bring your account below the appropriate loan to value ratio to help manage your risk of being in a margin call.