Leveraging your investment portfolio in times of opportunity

In recent months, more and more clients have been asking me about financial opportunities to create liquidity.

In a low-interest rate environment, borrowing against fixed assets —such as cash-out mortgage refinances or HELOCs on residential property — can be attractive and may even offer tax benefits, but they can come with closing costs and other fees. An alternative to increasing your residential debt, is to use an investment management portfolio as collateral. Established as a revolving line of credit, this credit facility only charges interest on what you borrow and allows you to repay the balance and borrow over and over again. The interest rates are often less expensive than HELOCs, and are fast and easy to set up with no fees. Depending on how you use the debt and what types of investment holdings are collateral, you may even be able to deduct the interest expense.

If you are looking to purchase a second home, investment real estate, or make a private investment, levering your brokerage or investment account can be a fast, cost effective way to access cash. When determining the best liquidity options to finance transactions it's important to consult with an expert who can help you access the different options, monitor debt balances, and determine the right strategy for repayment.

Here are a few credit solutions that use a securities portfolio as collateral.

Sources of borrowing

There are two main ways to borrow against your investment portfolio: Broker-Dealers offer traditional margin accounts, and banks offer lines of credit against your investment portfolio.

Margin accounts

Margin accounts are typically set up so that clients can borrow against their portfolio to buy more securities, but proceeds can be used for other purposes as well. The amount of money that can be borrowed against the account varies depending on the value of the holdings but is usually capped at 50 percent. Borrowing rates are determined by the Broker Dealer and are usually a spread plus Libor or Fed Funds.

One characteristic of a margin account is that it can be subject to a margin call if the value of the collateral value dips, usually because of a losing trade. In that case, you would need to put additional capital or securities into the account. Another factor to consider: If you don't pay close attention, it can be easy to keep borrowing without realizing it.

Lines of credit

There's also another way to borrow against your portfolio: using a bank line of credit. This is similar to a margin account but it's more structured and has a formal credit limit that's set up at the time of application. The rates against the securities can range from 60 to 70 percent for equities, 80 percent for bonds and 90-100 percent for cash or cash equivalents.

A line of credit, unlike a margin loan, cannot be used to purchase securities such as stocks or bonds. Most clients use bank lines to acquire second homes, purchase large personal items such as boats or artwork, or to make private investments. A line of credit can be a very effective way to make a large purchase on a very short time frame, often putting the purchaser in a preferred negotiating position.

Bank lines are still subject to margin calls if there is not enough collateral to support the credit balance, but some banks have longer cure periods. Often a banker works with a client to determine the overall borrowing strategy and repayment structure as well as reviewing the rate environment and debt levels as part of a balance sheet review.

Why borrow?

During times of transition, volatility or unpredictability, it's helpful for clients to have liquidity options and flexibility. Some will want a short term line of credit that is used for one or two transactions, while others will feel more comfortable with a line of credit to use for regular or emergency cash needs over longer durations.

Bridge financing

Home purchases: If you are relocating and have found a home, but have yet to sell your current property, having a line of credit to use for the purchase can assist in the transition between properties. Similarly, clients who are buying a home that have competing offers may want to forgo a mortgage contingency and have additional time to put a purchase mortgage in place. Ultimately, the line of credit is paid off with proceeds of a permanent mortgage on the property, but in the short term, a line of credit allows for more flexibility with timing and negotiations.

Irregular cash flow: For clients who have lumpy income and needs to pay taxes or other expenses, having a line of credit can make it easier to maintain a savings and investment plan by bridging cash flow rather than liquidating investments to make those payments.

Estate planning

Gifting: For parents who would like to gift money to adult children to help with buying a home or starting a business, but don't want to sell appreciated assets, borrowing against a portfolio can help avoid capital gains and provide liquidity to make cash gifts.

Step up in Basis: Similarly, for individuals who live off principal distributions out of investment portfolios and may have imbedded gains or low basis stock (often seen with concentrated equity positions), using a line of credit can reduce asset sales and defer taxes until there is a step up in basis at the time of death.

Tax/arbitrage benefits

Some accredited investors will use a portfolio secured line of credit proceeds for capital calls and private investment transactions. In some cases, the interest expense on the line of credit can be deducted. Every individual's tax situation is unique, so always consult with a tax professional before making a decision. Additionally, if the line of credit rate is lower than the rate of return on what would have been liquidated to fund the investment, there is an arbitrage benefit, potentially leading to the creation of additional wealth.

Given the current low interest rate environment, leveraging investment portfolios can be prudent and offer flexibility. However, clients can run into trouble if they don't understand all the terms or mismanage the process. Before leveraging your accounts, it's advised to speak with your Wealth Advisor or Private Lender to go over the risks involved and create a customized plan that works for you. A SVB Private Wealth team can work with you to manage your debt via a strategy that works with your goals and finances.