Pay off "refinance" mortgage with margin loan / pledged asset line to stay invested and reduce taxes?

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Topic Author
harikaried
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Pay off "refinance" mortgage with margin loan / pledged asset line to stay invested and reduce taxes?

Post by harikaried »

People can get 1.x% margin rates at Fidelity using their securities/assets as collateral (and some negotiation). We have a commercial loan near 5% that will end its prepayment penalty period mid-2022, and by then we should have enough in our taxable account to pay it off. The gains in the taxable account will likely exceed the losses harvested in 2020 and enough that it will probably push us past net investment income tax levels for ~19% capital gains rate.

When does it make sense to use a margin loan to stay invested while also reducing taxes by not realizing gains?

Directly comparing percentages doesn't seem to make sense as there's basis and offsetting losses, etc. And there's always the potential that the gains could be realized at 0% at some point, so in some sense any margin rate is higher than $0, but it could still be worthwhile to avoid the mortgage interest expense?


Additional info for our situation:

The commercial loan will also adjust when the prepayment period ends, and if it did so today, I believe the rate would adjust down and monthly payments reduced because we have prepaid annually up to the penalty-free exemption level. This reduced monthly payment has happened for our primary residence as we've had multiple ARMs including a 3/1 that reamortized to ⅓ of the original payment (as we were paying it off anyway), and wife enjoys having our home paid off, so cash-out refinance is not really an option. The loan also balloons 5 years after adjusting, but the plan is to put in additional owner contributions to pay off all principal early even though cash flow from rent would be enough.

Our overall asset allocation has been adjusted more aggressive each time we pay down the debt as we sell bonds to make the principal curtailment, but we'll likely go no less than 10% bonds even when the debt is paid off. When we initially purchased the commercial property, we did draw $50k from each of HELOC and 401k loan, and the HELOC repaid within a few months and 401k a few years (somewhat held off on this one because the "interest" was letting us put more money into the 401k, but that was the last loan other than the commercial one).

For the potential margin rate negotiations with Fidelity, our taxable account is relatively small, but our IRA balances exceed the loan as well as each of our 401k accounts, but I'm not sure if all these assets at Fidelity would be taken into consideration for the margin loan rate. Also, there's some logistical aspects of we primarily use the Cash Management Account for checking and taxable investing, but it doesn't support margin while our usually $0 balance adjacent "brokerage" account can get margin added and shares transferred over. I've read there might be some 30 day delay in "cash" vs margin availability?
Last edited by harikaried on Wed Sep 15, 2021 3:36 pm, edited 1 time in total.
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

Does it make sense to realize any gains while we have the carryover losses if we were to go the margin loan route? If we don't then we can use $3k against regular income. Or maybe realize short term high basis gains and save the long term in hopes for 0%?

Originally I was thinking of selling some of taxable and using up all the carryover losses, but then that would likely more directly impact how much we could get on margin.
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

Should the floating rate aspect of the margin loan matter much if initially so much additional cash flow will be used for principal curtailment, so even if the interest rates keep increasing, the balance would be much lower than keeping the original loan?

Assuming the commercial loan keeps the current rate instead of adjusting next year, it would be paid off in 5 years with rental income just before ballooning. If instead we switched to a margin loan at 2% that increased say 0.15% every month (i.e., 2.9% at 6 months in, 3.8% 12 months, 5.6% 2 years, 9.2% beginning 5th year, would be 11% after 5th year), the loan would be paid off in the same time (and similar total interest paid). The "average" interest rate by month would be 6.5% but the dollar weighted interest rate would be lower (i.e., effectively the same as the original loan).

Of course, we wouldn't keep the margin loan if it got anywhere near 11% and probably pay it off or find other financing.
sc9182
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by sc9182 »

You appear to talk multiple streams of fairly large income, and 5’ish time frames., and margin loan sizes much smaller portion of your brokerage portfolio (if not, stop reading below :-)

Elsewhere in other recent threads I’ve (and couple of others) have posted three major brokerages offering margin rates under 1.25% with good negotiation. Having said that., Fidelity’s margin rate has been tendency to change less often.. may be you could consider going that route !?
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

sc9182 wrote: Sun Sep 12, 2021 6:10 amYou appear to talk multiple streams of fairly large income … and margin loan sizes much smaller portion of your brokerage portfolio
We do have multiple W2s and 1099s, but a good chunk of the rental income does need to go to the current loan although a potential 2% margin loan would have interest charges that are less than ⅙ of the current amortized mortgage payments, so there would be plenty of cash flow to pay down loans.

Our taxable brokerage portfolio actually isn't that big as we have been using it to pay down the loan ahead of it adjusting. It sounds like the main / only(?) factor of the rate is the taxable account size, so income doesn't directly matter other than the savings to grow the account balance? In that case, would it help to boost the balance by getting extra money with HELOC and 401k loan?
sc9182
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by sc9182 »

harikaried wrote: Mon Sep 13, 2021 5:27 am
sc9182 wrote: Sun Sep 12, 2021 6:10 amYou appear to talk multiple streams of fairly large income … and margin loan sizes much smaller portion of your brokerage portfolio
We do have multiple W2s and 1099s, but a good chunk of the rental income does need to go to the current loan although a potential 2% margin loan would have interest charges that are less than ⅙ of the current amortized mortgage payments, so there would be plenty of cash flow to pay down loans.

Our taxable brokerage portfolio actually isn't that big as we have been using it to pay down the loan ahead of it adjusting. It sounds like the main / only(?) factor of the rate is the taxable account size, so income doesn't directly matter other than the savings to grow the account balance? In that case, would it help to boost the balance by getting extra money with HELOC and 401k loan?
would it help to boost the balance by getting extra money with HELOC and 401k loan?

Lol, why would you want to possibly want to pay 2-3- or 4% or higher loan rates on such loans, and put those monies in brokerage— then turn around to obtain 1.x % margin loan on 60% of Brokerage account value!? To me this math not adding up.

Ultra low rate Margin loan (a tiny portion) could help for short term financial needs — but this is assuming you already have good sized brokerage account to begin with (but building brokerage account with higher cost borrowed money such as HELOC etc doesn’t seem to add up)
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

sc9182 wrote: Mon Sep 13, 2021 6:02 amwhy would you want to possibly want to pay 2-3- or 4% or higher loan rates on such loans, and put those monies in brokerage— then turn around to obtain 1.x % margin loan on 60% of Brokerage account value!?
Yes obviously it doesn't make sense to hold both long term. I wasn't sure if the margin loan rate was like lower expense ratio mutual funds with minimum initial investment amounts that let you stay invested even when dropping below that minimum, so using other loan for a very short liquidity need to get a better margin rate.

Does the margin rate negotiation end up at some spread amount over the reference rate based on some pledged amount of assets "to transfer in" or the actual amount of assets in the account?
sc9182
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by sc9182 »

harikaried wrote: Mon Sep 13, 2021 11:49 am
sc9182 wrote: Mon Sep 13, 2021 6:02 amwhy would you want to possibly want to pay 2-3- or 4% or higher loan rates on such loans, and put those monies in brokerage— then turn around to obtain 1.x % margin loan on 60% of Brokerage account value!?
Yes obviously it doesn't make sense to hold both long term. I wasn't sure if the margin loan rate was like lower expense ratio mutual funds with minimum initial investment amounts that let you stay invested even when dropping below that minimum, so using other loan for a very short liquidity need to get a better margin rate.

Does the margin rate negotiation end up at some spread amount over the reference rate based on some pledged amount of assets "to transfer in" or the actual amount of assets in the account?
Sure they may commit a certain rate based on what you intend to transfer-in., but over time, if those balances do not raise to your previously agreed numbers -- not sure what different Brokerages intend to do at that point .. worse thing is you may have to pack-bags and move due to their increased rate, or pay-off that margin :oops:
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

I suppose another potential approach is a hybrid / partial "refinance" where assuming we can't pay off the current loan due to insufficient taxable balance to margin, we could hope the current loan adjusts to low enough monthly payments and aggressively pay down whichever has lower rate -- likely the adjusted current loan at least in the near term, so then just let the margin loan accrue?
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan to stay invested and reduce taxes?

Post by harikaried »

Reading through other topics about usages of margin loan, they generally focus on investing with the hopes of returns outpacing interest, so those percentages are directly comparable. But if the goal of the loan is to reduce taxes/expenses, it seems to want comparison of dollars over some time?

For example, $100k basis with 100% gains taxed at 15% is $15k expense (netting $185k) whereas a loan for $185k @ 2% incurs $3.7k/yr interest. So it seems like this ~4 year breakeven suggests preferring the loan to have lower interest paid than capital gains tax before that time? This is assuming some future opportunity to have $0 capital gains tax.

If that reasoning is correct, it seems like I should be looking at the % gains of each potential lot to sell in order to see if the breakeven time at some interest rate is "too short?"
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan / pledged asset line to stay invested and reduce taxes?

Post by harikaried »

After chatting with Fidelity, sounds like they do indeed negotiate down from their posted ~6% rates but pointed out that they wouldn't be able to beat IBKR, which I wasn't really asking for. It would be a different team to decide on the final margin rate/spread anyway. There was also a suggestion to look into pledged asset lines / non-purpose loans that could have better rates and terms (notably locking in a lower rate now given that we don't need to use the money until next year).
Topic Author
harikaried
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Re: Pay off "refinance" mortgage with margin loan / pledged asset line to stay invested and reduce taxes?

Post by harikaried »

Got more details about Fidelity's Pledged Asset Line, and it's through Goldman Sachs where in addition to providing the PAL (currently 1-month LIBOR + 3%, which is better than Schwab's posted 3.4% spread over SOFR), they want to manage the portfolio to provide value. They indicated they do have broad market ETFs but not necessarily the specific ones we have, so they might need to sell assets, which would trigger a taxable event and defeating much of the purpose of us getting a PAL to begin with. They did say they could try matching a written rate offer from Schwab, where others have been getting +1.25/1.4% spread recently.

I guess back to trying to negotiate a plain margin loan with Fidelity.
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