Line of credit secured by brokerage account

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VoiceOfReason
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Line of credit secured by brokerage account

Post by VoiceOfReason »

My broker has reviewed with me a line of credit secured by my brokerage account. No credit check, no costs to have it setup. You get to borrow up to a certain % of the value of you taxable brokerage account to use for anything except securities trades.

They say people use this all the time for short term loans as a way to get access to $ without having to sell anything in the portfolio and thus creating a large capital gains event. They said this is what many wealthy people do to make “cash” offers on real estate. Then simultaneously get a mortgage on the property. Among many other things, buying cars, vacations, weddings, etc. and paying it back quickly especially for people that get larger quarterly or year end compensation.

At first I was very skeptical but the rates are very competitive. About the same rate of a 30 year fixed mortgage.

Curious what the consensus and experience have had with this line of credit.
runswithscissors
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Re: Line of credit secured by brokerage account

Post by runswithscissors »

I am curious about this too, particularly how this will show on a credit report and how it will impact a credit score. One downside off the bat is if the value of your account holdings drops below a threshold, you'll be forced to pay down the line much like you would with a margin call. I'd also assume holdings could be sold off if you don't cover the minimum delta within a specified period of time.
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whodidntante
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Re: Line of credit secured by brokerage account

Post by whodidntante »

I think everyone with a large taxable account should have margin or a pledged asset line setup as a convenient source of liquidity. The lowest margin rates for small time investors are at IB, and I doubt you will find anything better anywhere. But I've heard that Schwab and Morgan Stanley also offer good rates on pledged asset lines.
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VoiceOfReason
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Re: Line of credit secured by brokerage account

Post by VoiceOfReason »

runswithscissors wrote: Mon Jun 22, 2020 1:41 pm I am curious about this too, particularly how this will show on a credit report and how it will impact a credit score. One downside off the bat is if the value of your account holdings drops below a threshold, you'll be forced to pay down the line much like you would with a margin call. I'd also assume holdings could be sold off if you don't cover the minimum delta within a specified period of time.
Yes, exactly. Your borrowing limit (is uniquely calculated and set by the broker based on what you’re invested in) is usually around 60-75% the value of the account.

So say you have $1mm in your account, you can borrow ~$700k. If you borrow up to the limit of $700k and the account value goes down even 1%, you get the margin call. Then you have 5 days to either sell some securities to safer investments/cash or add new funds to the account or pay down the debt on the line of credit. For this reason they do not recommend coming close to your credit limit.

I just cannot believe the rates offered and the liquidity it provides.
mptfan
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Re: Line of credit secured by brokerage account

Post by mptfan »

VoiceOfReason wrote: Mon Jun 22, 2020 1:33 pm At first I was very skeptical but the rates are very competitive. About the same rate of a 30 year fixed mortgage.
Can you be more specific, what are the rates?
BSBHead
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Re: Line of credit secured by brokerage account

Post by BSBHead »

Understanding the fine print will be helpful. What is the right of set-off rules? Could they give a certain notice (e.g. 30 days) to cancel, which may mean you may have to liquidate proceeds at a time you really don’t want to liquidate? Banks are in and out of securities lending due to regulatory changes, so understanding how and when the bank can cancel the credit facility is important.
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cchrissyy
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Re: Line of credit secured by brokerage account

Post by cchrissyy »

very interesting, thanks for starting the thread!

rates and fine print here for schwab
https://www.schwab.com/public/schwab/ba ... asset_line
mushyyy
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Re: Line of credit secured by brokerage account

Post by mushyyy »

Are there any advantages vs a standard mortgage?
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whodidntante
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Re: Line of credit secured by brokerage account

Post by whodidntante »

mushyyy wrote: Mon Jun 22, 2020 4:22 pm Are there any advantages vs a standard mortgage?
I opined in this post.

viewtopic.php?f=2&t=317083&p=5300795&hi ... n#p5300795
informal guide
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Re: Line of credit secured by brokerage account

Post by informal guide »

In essence, a margin brokerage account at an institution like Vanguard or Fidelity can provide this liquidity, up to around 50% of account value, assuming the securities in the account are eligible. Margin borrowing is often used for leveraging portfolio purchases, but can be used for other purchases. One attractive element is that margin borrowing is not, at least to my knowledge, reported on consumer credit reports. I successfully used it years ago as a bridge loan in a residential real estate transaction. The buyer of my old house wanted to close several weeks after I was closing on my new house. So I had a large margin loan for about a month, secured by my securities (mutual funds and stocks) at the brokerage.

Vanguard has a detailed brochure that includes a good discussion of risks and costs and mechanics. One can easily apply online at no cost until you borrow. (my guess is that Vanguard is more conservative than other brokers in approving margin borrowing).

Here is a link to Vanguard's brochure:

https://personal.vanguard.com/pdf/margin.pdf?2210156627
nalor511
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Re: Line of credit secured by brokerage account

Post by nalor511 »

I don't want to move my assets to IB, it would be nice if one of the big 3 would lower their margin loan rates to match IB
skibummer
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Re: Line of credit secured by brokerage account

Post by skibummer »

whodidntante wrote: Mon Jun 22, 2020 1:45 pm I think everyone with a large taxable account should have margin or a pledged asset line setup as a convenient source of liquidity. The lowest margin rates for small time investors are at IB, and I doubt you will find anything better anywhere. But I've heard that Schwab and Morgan Stanley also offer good rates on pledged asset lines.
Is this PAL account from Schwab or other similar pledged accounts considered a margin account? It is my understanding that a margin account allows the brokerage to loan out your shares and instead of getting qualified dividends you may receive a substitute payment in lieu of dividends. This is the same dollar amount as the dividend you did not receive, but it no longer gets the favorable tax rate of a qualified dividend. In a cash account, your broker isn't allowed to use your shares to lend to short-sellers, preventing the payment in lieu situation from coming about. By contrast, a margin account usually includes provisions allowing your broker to lend your shares whenever it wants.
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whodidntante
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Re: Line of credit secured by brokerage account

Post by whodidntante »

skibummer wrote: Mon Jun 22, 2020 5:00 pm
whodidntante wrote: Mon Jun 22, 2020 1:45 pm I think everyone with a large taxable account should have margin or a pledged asset line setup as a convenient source of liquidity. The lowest margin rates for small time investors are at IB, and I doubt you will find anything better anywhere. But I've heard that Schwab and Morgan Stanley also offer good rates on pledged asset lines.
Is this PAL account from Schwab or other similar pledged accounts considered a margin account? It is my understanding that a margin account allows the brokerage to loan out your shares and instead of getting qualified dividends you may receive a substitute payment in lieu of dividends. This is the same dollar amount as the dividend you did not receive, but it no longer gets the favorable tax rate of a qualified dividend. In a cash account, your broker isn't allowed to use your shares to lend to short-sellers, preventing the payment in lieu situation from coming about. By contrast, a margin account usually includes provisions allowing your broker to lend your shares whenever it wants.
They won't do that for fully paid shares unless you sign a fully paid lending agreement (or whatever your broker calls it). And there is typically compensation for the unfavorable tax consequences, which is kind of the point of a fully paid lending agreement. If you buy shares on margin, yes, they might lend those out to a short seller.
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whodidntante
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Re: Line of credit secured by brokerage account

Post by whodidntante »

nalor511 wrote: Mon Jun 22, 2020 4:45 pm I don't want to move my assets to IB, it would be nice if one of the big 3 would lower their margin loan rates to match IB
As long as we are wishing, I want a free puppy that will never die.
MarkerFM
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Re: Line of credit secured by brokerage account

Post by MarkerFM »

nalor511 wrote: Mon Jun 22, 2020 4:45 pm I don't want to move my assets to IB, it would be nice if one of the big 3 would lower their margin loan rates to match IB
Depending upon how much you have at the brokerage, they will negotiate posted rates. I did so with Fidelity and actually quoted the IB rates. My Fidelity rep told me that was helpful because it helped make the case for getting a low rate. The size of the amount outstanding also affects the rate.

We used our margin account to the tune of seven figures plus during a year or two period where we owned four houses, working our way down to two. The rate was very low.

It does not appear on any credit report. I believe some of the interest might be deductible as investment interest, but this would be highly depended upon your circumstances. They all calculate the permitted borrowing amount the same way based on (I think) SEC and exchange rules.
skibummer
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Re: Line of credit secured by brokerage account

Post by skibummer »

whodidntante wrote: Mon Jun 22, 2020 5:08 pm
nalor511 wrote: Mon Jun 22, 2020 4:45 pm I don't want to move my assets to IB, it would be nice if one of the big 3 would lower their margin loan rates to match IB
As long as we are wishing, I want a free puppy that will never die.
Looks like IB has great margin rates. They have a Pro (max $10/month maintenance fee or trade costs) or Lite (free) account versions. A loan balance of less than $100,000 is 1.59% for Pro and 2.59% for Lite (if your loan balance is more than $12,000 for the year) you should go with Pro. Pro has trading fees, but trading $100,000 of VTI would cost less than $2.25.

https://www.interactivebrokers.com/en/i ... =46376&p=m
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VoiceOfReason
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Re: Line of credit secured by brokerage account

Post by VoiceOfReason »

mptfan wrote: Mon Jun 22, 2020 3:24 pm
VoiceOfReason wrote: Mon Jun 22, 2020 1:33 pm At first I was very skeptical but the rates are very competitive. About the same rate of a 30 year fixed mortgage.
Can you be more specific, what are the rates?
4.0% for a line of credit up to $500k. If you qualify fir $1mm it was 2.9%. And trended down from there the more $ you have in the account. Your rate is based on the max you are eligible for. So the $1mm line gets you 2.9% on any $ you borrow. If it’s $10k or $100k. Same 2.9%.
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Re: Line of credit secured by brokerage account

Post by Gill »

Interest isn’t deductible, of course.
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Re: Line of credit secured by brokerage account

Post by simas »

VoiceOfReason wrote: Mon Jun 22, 2020 1:33 pm My broker has reviewed with me a line of credit secured by my brokerage account. No credit check, no costs to have it setup. You get to borrow up to a certain % of the value of you taxable brokerage account to use for anything except securities trades.

They say people use this all the time for short term loans as a way to get access to $ without having to sell anything in the portfolio and thus creating a large capital gains event. They said this is what many wealthy people do to make “cash” offers on real estate. Then simultaneously get a mortgage on the property. Among many other things, buying cars, vacations, weddings, etc. and paying it back quickly especially for people that get larger quarterly or year end compensation.

At first I was very skeptical but the rates are very competitive. About the same rate of a 30 year fixed mortgage.

Curious what the consensus and experience have had with this line of credit.
it is called margin loan and is generally a bad idea unless your portfolio is extremely stable in value and you also have free cash to back it up if it gets called (or your positions get liquidated). this is one of the ways (margin loan) how brokerages make money (along with payments for order flow, short selling securities landing ,and formerly commissions).

don't do it. whether reg T or portfolio margin, still -> if you have to ask about it, it is not for you.
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