Calculating the buffer
Calculating the buffer
The buffer is an allowance over and above the approved loan to value ratio or Lending Ratio to accommodate small market fluctuations without triggering a Margin Call. In most circumstances, Leveraged offers a buffer of 10%.
Important information to remember when considering the buffer:
- Cash and cash like products will not have any buffer applied.
- Put protected holdings will not have any buffer applied.
- The buffer is not intended to provide additional borrowing capacity.
Case study - calculating the buffer:
- Identify all acceptable investments with a lending ratio applied;
- Calculate the market value of these acceptable investment; and
- Sum the total of the buffers for each acceptable investment.
Eg. Share A buffer of $3,500 + Share B buffer of $2,500 = Total buffer of $6,000
| Share A | Fund B | CMA | Total | |
| Market Value | $35,000 | $50,000 | $4,200 | $89,200 |
| Lending Ratio | 75% | 60% | 100% | |
| Lending Value | $26,250 | $30,000 | $4,200 | $60,450 |
| Buffer | 10% | 5% | 0% | |
| Buffer Amount | $3,500 | $2,500 | $0 | $6,000 |
If we assume a current loan of $63,000, based on the above calculation the margin loan would be “in the buffer”. While the borrower is not required to take any action at this stage the margin loan should be monitored, so that the borrower may wish to take action to avoid a margin call.
The loan exceeds the Lending Value by $2,550 ($63,000 - $60,450) but this is less than the buffer of $6,000.
However, a $67,000 loan would be exceeding the allowable buffer and be subject to a Margin Call. A Margin Call will require the borrower to bring the gearing level back to a level determined by the lender within a short time frame i.e. 24 hours.
This is because the loan exceeds the lending value by $6,550 ($67,000 -$60,450), which is greater than the buffer of $6,000.
It is important to remember the buffer will change with market movements. In a falling market, with a falling portfolio value, the buffer reduces proportionately also.
For the Leveraged Margin Loan and Investment Funds Multiplier products, Leveraged offers buffer alerts* whereby you are provided an alert that your facility is over 50% of the provided buffer amount.
If you would like more information on buffer alerts, how the buffer is calculated and how this relates to your portfolio, please contact our team on 1300 307 807.
This information is correct as 22 August 2024
Things you should know
*Alerts are an additional service and not notices the lender may be required to give. The lender provides these alerts on a best endeavours basis and you should always monitor your margin loan.
Gearing involves risk. It can magnify your returns; however, it may also magnify your losses.
Issued by Leveraged Equities Limited (ABN 26 051 629 282 AFSL 360118) as Lender and as a subsidiary of Bendigo and Adelaide Bank Limited (ABN 11 068 049 178 AFSL 237879). This information is correct as 22/08/2024. Information is general advice only and does not take into account your personal objectives, financial situation or needs. The views of the author may not represent the views of the broader Bendigo and Adelaide Bank Group of companies (“the Group”). This information must not be relied upon as a substitute for financial planning, legal, tax or other professional advice. You should consider whether or not the product is appropriate for you, seek professional financial advice and read the Product Disclosure Statement and Incorporated Statements (together, the ‘PDS’) and Product Guide, together with the terms and conditions applying to the product or service, available on the individual product pages of this website before making an investment decision. Not suitable for a self-managed superannuation fund.
The information provided in this document has not been verified and may be subject to change. It is given in good faith and has been derived from sources believed to be accurate. Accordingly no representation or warranty, express or implied is made as to the fairness, accuracy, completeness or correction of the information and opinions contained in this article. To the maximum extent permitted by law, no entity in the Group, its agents or officers shall be liable for any loss or damage arising from the reliance upon, or use of the information contained in this article.
