What are the risks?

The most common risks

Market volatility
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 BT Margin Loan Facility.

Clearance of margin calls

When any of the scenarios above result in a margin call, you need to ensure that you have the capability to correct this by either:

• Having access to an alternative source of funds to repay part or all of the margin loan
• Having additional acceptable security (investments) to contribute to the margin loan, so that your borrowing limit can be restored to a level above the outstanding loan balance
• Selling part of your investments and using the proceeds to reduce the loan balance below the borrowing limit.

Ways to mitigate the risk

Seek professional advice
We recommend that all investors seek the professional advice of a financial adviser and tax adviser.

Borrow what you can afford
Not borrowing to the full extent allowed for any approved security helps mitigate the risk. By reducing your gearing, you can add protective measures to your portfolio and have lower interest costs.

Diversify your portfolio
You can help manage the impact of market movements on your investment by diversifying across different sectors. A diversified portfolio enhances the ability to balance exposure over various sectors, so you can reduce the risk that poor performance in one investment will reduce your total return.

Repay and reinvest
Paying your loan interest as it falls due helps to keep your loan balance from increasing. Reinvesting your dividends and distributions to your investment portfolio increases your borrowing limit, or you can use them to reduce your loan balance.

Maintain a cash reserve
It is a good idea to actively monitor your cash flow and ensure you do not use up all of your available funds. Try maintaining a cash reserve which may help you avoid a margin call. Available cashflow is also important for managing any timing issues, such as dividend payments that do not coincide with your interest payments.

Register for buffer and margin call alerts
We encourage you to register for email and/or SMS alerts. We will contact you when your loan balance exceeds 50% of your buffer or triggers a margin call.

Monitor your portfolio
Keep an eye on your portfolio on a regular basis. We provide you with online access to your loan and your portfolio details 24 hours a day, 7 days a week.

The information on this page forms part of the BT Margin Lending Margin Loan Product Disclosure Statement issued 15 November 2010.

You should also read the BT Margin Lending Margin Loan Product Disclosure Statement, which contains information about the risk of losing money.