What is the multiplier effect?
If you use your funds available to buy approved investments for your loan portfolio, then your borrowing limit also increases – potentially giving you more funds available to invest.
Funds available is defined as the amount available for further investment at any one time. It is calculated by taking the lesser of your borrowing limit and your credit limit and then subtracting your loan balance.
The multiplier effect means you could potentially borrow up to four times the amount of your original funds available, depending on the Loan to Value Ratio (LVR) of your new investments and your credit limit.
Let’s assume the following portfolio:
| Sample portfolio | Market value | LVR | Borrowing limit |
|---|---|---|---|
| ABC Fund | $20,000 | 65% | $13,000 |
| DFG Ltd | $10,000 | 60% | $6,000 |
| XYZ Bank | $6, 000 | 50% | $3,000 |
| Total | $36,000 | 61% | $22,000 |
| Maximum amount you can borrow (funds available to invest) | $22,000 | ||
So, your $22,000 in funds available – with the multiplier effect – could be used to buy $55,000 LMN Ltd shares (see table below), with a LVR of 60%. You now have a loan balance of $55,000. But by adding the new shares to your loan portfolio, the borrowing limit also increases by $33,000 ($55,000 x 60%) to $55,000.
The table below shows how using your funds available for further investments can create additional funds available, which is known as the multiplier effect.
| Sample portfolio | Market value | LVR | Borrowing limit |
|---|---|---|---|
| ABC Fund | $20,000 | 65% | $13,000 |
| DFG Ltd | $10,000 | 60% | $6,000 |
| XYZ Bank | $6, 000 | 50% | $3,000 |
| LMN Ltd (additional purchase) | $55, 000 | 60% | $33,000 |
| Total | $91,000 | 60% | $55,000 |
| Loan balance to fund additional purchase | $55, 000 | ||
| Funds available | $0 | ||
Note: The loan balance is the maximum gearing available.
Examples given are for illustrative purposes only and cannot be relied upon as any indication of the outcomes of investment. Neither BT Securities Limited (BTS), nor any director, officer, employee or associate of BTS or of any related entity make any express or implied representation or warranty regarding the accuracy or completeness of this information, except to the extent that liability cannot be excluded by law.
Any projections given on this website are predictive in character. While every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ from these projections.
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