Lesson 4 of 25 · 6 min

Why capacity reads as permission

The available figure is an output of the lender's recovery model, not a statement about what is comfortable.

Capacity is a number the lender computes about itself. It answers one question: how much can be advanced against this collateral such that a forced sale still recovers the balance? It is a statement about the lender's tolerance for its own loss, expressed in dollars that happen to be payable to you.

It is nonetheless presented as an amount available, and an amount available reads as an amount permitted. The framing carries an implicit endorsement that no one at the lender intended and that no clause anywhere confirms. A speed limit reads as a permission in the same way, and for the same reason: a constraint stated as a maximum is easily heard as a recommendation to approach it.

The arithmetic of approaching it is unforgiving. Collateral of $2,140,000 at a 58 percent advance rate gives a capacity of $2,140,000 × 0.58 = $1,241,200. Draw all of it against a maintenance threshold of 70 percent of market value and the trigger value is $1,241,200 ÷ 0.70 = $1,773,143, so headroom is ($2,140,000 − $1,773,143) ÷ $2,140,000 = 17.1 percent. Draw half — $620,600 — and the trigger value is $886,571, leaving ($2,140,000 − $886,571) ÷ $2,140,000 = 58.6 percent.

Halving the draw more than trebles the cushion. That non-linearity is why the full-capacity draw is a different animal from a large draw, and it is invisible in the way capacity is quoted, because capacity is quoted as a single figure with no derivative attached. Track 1 lesson 5 makes the same point from the lender's side: drawing the maximum sets the cushion at its minimum by definition, since the maximum is defined as the point where the cushion runs out.

Key terms

Capacity: Collateral value multiplied by advance rates. The largest sum the lender will advance, computed from its own recovery risk.
Availability framing: Presenting a constraint as an amount on offer. The same figure reads as a limit or as an entitlement depending on which side states it.
Utilisation: The fraction of capacity actually drawn. Headroom falls non-linearly as it rises.

Worked example

What a half draw buys that a full draw does not

Collateral $2,140,000, advance rate 58%, maintenance threshold 70% of market value.

Capacity: $1,241,200
Trigger value at a full draw: $1,773,143
Headroom at a full draw: 17.1%
Trigger value at a half draw: $886,571
Headroom at a half draw: 58.6%

Half the money, three and a half times the cushion. The capacity figure contains no hint that the relationship is shaped this way.

Check yourself

Capacity on $2,140,000 of collateral is $1,241,200 at a 58 percent advance rate, with a 70 percent maintenance threshold. Compare headroom at a full draw and at a half draw.

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.