Lesson 5 of 20 · 6 min
Term five: a maintenance threshold governs the call
One stated level decides when additional collateral or repayment can be required.
The fifth term names the trigger. A maintenance threshold governs when the lender may require additional collateral or repayment — and everything in Track 1 about headroom and forced-sale multiples is downstream of this one number.
Three attributes of the threshold need to be read out of the agreement, and all three are commonly missed.
What to establish about your own threshold:
- The level itself, as a percentage.
- The basis: whether it applies to market value or to collateral value after haircuts. Track 1 lesson 6 showed the same loan can read 42% on one basis and 62% on the other.
- Whether the level is fixed or may be revised, and whether different levels apply to different asset types.
The basis question is the one that changes answers most. A borrower who reads a 70 percent threshold and computes loan-to-value against market value can believe they have twenty points of room they do not have. Nothing about the arithmetic is difficult; the error is in the denominator, and it is silent.
It is also worth knowing that a threshold governs when a demand may be made, not when one will be. Some lenders act at the stated level, some maintain internal buffers and act earlier, and the agreement's language typically permits action at or beyond the threshold rather than obliging it at a precise point. Treating the number as a bright line is close enough for planning and not a guarantee of timing.
Key terms
- Maintenance threshold
- The loan-to-value level at which the lender may require additional collateral or repayment. The trigger for everything else.
- Basis
- Whether the threshold is measured against market value or collateral value after haircuts. Determines the denominator, and therefore the answer.
- Trigger value
- The collateral value at which your loan-to-value exactly equals the threshold. Balance divided by threshold.
Worked example
The same threshold, read two ways
Balance $310,000, market value $742,000, blended advance rate 68%, so collateral value $504,560. Threshold 70%.
- LTV against market value
- 41.8%
- Headroom on that reading
- 40.3%
- LTV against collateral value
- 61.4%
- Headroom on that reading
- 12.2%
- Difference in apparent headroom
- 28 points
- Which is correct
- Whichever basis the agreement names
Trigger collateral value $442,857.
One agreement, one loan, one afternoon, and a 28-point difference in how much room the borrower believes they have.
Check yourself
Before computing anything about your threshold, what must you establish first, and why does it come before the arithmetic?
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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.