Margin Loan instead of Mortgage.

[exodusNH]

Thank you. I like the fact that charles schwab has margin call unlike ibkr.

One more question. For 300k loaned, is there usually a payment schedule or you can pay back however you want?

That’s not how margin works.

In your account you’ll have VOO and a cash balance. Easy to understand. If you withdraw more cash than you have in your cash balance (yes they will let you do this) then you are officially using margin, and your cash balance will go negative. On every monthly statement, the broker will calculate the average negative balance for the month (if any) and then charge you the interest rate on that negative balance. That interest rate charge just gets added to your negative balance, making it more negative.

You can choose to pay down the negative balance (by depositing more cash or selling some VOO) whenever you’d like, in whatever amount you’d like. Or not at all.

Ok, so I am going to use hypothetical situation. I have never used margin so trying to understand as much as possible.

Say I have $0 in Cash and 1M in VOO in Schwab account

And I borrow 300k. (Negative Cash Balance)

I will pay 3 percent interest ($750/month) until I pay it back? (Or, just fill up the account with 300k which I may do at my own schedule?)

So say that i pay back 100k, then my interest goes down to $500/month and etc

More or less. Because you will be incurring interest, then interest on interest, your negative cash balance will continue to go more negative; the interest will grow slightly each month.

So i can either just pay off interest each month and keep it 300k borrowed

Or i can just pay off 50k/month plus a little bit of interest and pay off in 6 months

Or i can pay it back like mortgage.

Either way lots of flexibility and quick access to cash without selling my equity

Lastly, assuming my maintenance margin is 30 percent, i wont get margin call until portfolio drops 57 percent in value.

Yes on the repayments.

Not sure on the exact numbers regarding maintenance, but since you're only taking $300k against $1.2M, you have a good buffer.

The interest rate is almost certainly variable, so you'll want to keep an eye on that. The jobs report was really strong this month. If that keeps up, the Fed will almost certainly be aggressive on the next rate increase in September. (There are sites that track the probability of various rate increases.)

[CletusCaddy]

Thank you. I like the fact that charles schwab has margin call unlike ibkr.

One more question. For 300k loaned, is there usually a payment schedule or you can pay back however you want?

That’s not how margin works.

In your account you’ll have VOO and a cash balance. Easy to understand. If you withdraw more cash than you have in your cash balance (yes they will let you do this) then you are officially using margin, and your cash balance will go negative. On every monthly statement, the broker will calculate the average negative balance for the month (if any) and then charge you the interest rate on that negative balance. That interest rate charge just gets added to your negative balance, making it more negative.

You can choose to pay down the negative balance (by depositing more cash or selling some VOO) whenever you’d like, in whatever amount you’d like. Or not at all.

Ok, so I am going to use hypothetical situation. I have never used margin so trying to understand as much as possible.

Say I have $0 in Cash and 1M in VOO in Schwab account

And I borrow 300k. (Negative Cash Balance)

I will pay 3 percent interest ($750/month) until I pay it back? (Or, just fill up the account with 300k which I may do at my own schedule?)

So say that i pay back 100k, then my interest goes down to $500/month and etc

You got it, except that you don’t “pay the interest” unless you choose to, by adding cash to the account or selling shares. There’s no bill sent to you with a due date like with a credit card.

So you are saying 1M in VOO and 300k cash in Account and I borrow 300k in cash then i dont pay interest. Isnt it moot though? You can just use 300k you have as cash anyways.

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

[newyorker]

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

Now i am confused again

[CletusCaddy]

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

Now i am confused again

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88 and your new cash balance will be -$301,501.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

[newyorker]

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

Now i am confused again

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

[CletusCaddy]

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

Now i am confused again

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

[newyorker]

No that’s not what I’m saying.

I’m saying there is a difference between owing the interest and paying the interest.

Now i am confused again

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

[CletusCaddy]

Now i am confused again

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

[newyorker]

If you have a negative cash balance of -$300k and you do nothing, after one month you will have a negative cash balance of -$300,750.

That is the interest being added to your account.

If you don’t do anything, this will be your new negative balance for next month, and the next statement will apply the 3% annual interest rate to the -$300,750. So the interest rate charge this time will be $751.88

All I’m saying is that if you want to pay down the interest and keep the negative cash balance at -$300k, you have to proactively do it by adding cash or selling shares. Otherwise your negative cash balance will keep growing and compounding.

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

[CletusCaddy]

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

Yes

[newyorker]

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

Yes

Awesome schwab it is then. Im gonna see if Vanguard would do the same.

[126inc]

One thing I’ll caution is that even if you negotiate a great below-market margin rate like I did, it is a variable rate and it will move over time.

My 3% rate started at 1.5% six months ago. It’s not inconceivable that it will keep rising, past 5% which is what a lot of fixed rate mortgages are going for these days.

is it still 3% as of today? if so that's pretty good then, but strange as the fed rate has gone up 1.5% in the last 2 months alone

[CletusCaddy]

Oh of course, I can keep paying $750 per month and balance will stay as -300k forever. Or I can choose to pay more back and start paying back principal.

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

Here is the rate sheet for Schwab mortgages, including interest only mortgages

https://www.schwab.com/mortgages#bcn-ta ... tent-90641

Interestingly, the 10 year fixed rate interest only jumbo mortgage has a lower rate than the 5 and 7 years. Which implies that they think interest rates will be going down in the medium term.

Anyway, by moving $1M to Schwab it looks like you can get the 10 year IO mortgage for 3.75% during the 10 year interest only period.

[newyorker]

Yes

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

Here is the rate sheet for Schwab mortgages, including interest only mortgages

https://www.schwab.com/mortgages#bcn-ta ... tent-90641

Interestingly, the 10 year fixed rate interest only jumbo mortgage has a lower rate than the 5 and 7 years. Which implies that they think interest rates will be going down in the medium term.

Anyway, by moving $1M to Schwab it looks like you can get the 10 year IO mortgage for 3.75% during the 10 year interest only period.

Thank you

[indexfundfan]

Thank you. I am finally grasping the concept of margin account. Trying to understand pros and cons.

You can compare this to an interest only mortgage, which works the exact same way but the interest rate is locked for a fixed period of the time, 3-10 years.

Thank you! I will look into that. Do you know if schwab has margin call?

Yes

Awesome schwab it is then. Im gonna see if Vanguard would do the same.

Don't waste your time with Vanguard. I have never heard of anyone with a negotiated margin rate with them.

You can negotiate with Schwab. You can also try Fidelity or E*trade.

[martint]

Edit: Giving credit where it’s due, I initially missed Silly Wabbit’s full response, they also cite 66% drop as verge of margin call in this example. I’ll leave my post since it has the IBKR-specific links since OP was asking about Reg-T and Portfolio Margin details on a later part of the thread.

I’m really surprised by this thread. The OP asked a clear question (what’s the maintenance requirement for a margin loan at IBKR with only VOO in account) multiple times, and there’s been no direct response. Several people debating the merits of margin loans, several discussions about Schwab, only one link to IBKR.

OP:
- what type of IBKR account do you have?
- where are you a resident?
- what do you want to do with the borrowed cash? Withdraw it, or use it to buy more securities?

https://www.interactivebrokers.com/en/t ... ements.php Has all the IBKR requirements.

Assuming you’re US resident and IBKRPro account, these rules apply:
https://www.interactivebrokers.com/en/i ... 1004100808

(I’m not as familiar with IBKRLite, it’s possible the same rules apply for that account type, I didn’t check).

If you have a Reg-T Margin account you follow Reg-T margin requirements. IBKR also has something called Portfolio Margin which are higher limits.

“ Under SEC-approved Portfolio Margin rules and using our real-time margin system, our customers are able in certain cases to increase their leverage beyond Reg T margin requirements.”

For a detailed explanation of the math, see IBKRs Webinar https://www.interactivebrokers.com/en/? ... ntity%3Din

In your example, I’ll assume you are withdrawing the cash. Since money is fungible***, a way to view what you want to do is buy $1.2M of VOO with $900k cash.

Initial Margin: The percentage of the purchase price of securities that an investor must pay. Reg T calls for initial margin of up to 50%.

$300k borrowed / $1.2M total value = 25%. 25% is less than 50%, Reg-T initial margin requirement satisfied.

Maintenance Margin: The minimum amount of equity that must be maintained in the investor's margin account. Reg T calls for a maintenance margin of at least 25%.

Let’s say VOO drops 50%. The VOO is now worth 0.5*$1.2M = $600k. You still owe the brokerage $300k. So your equity is $600k - $300k = $300k.

$300k / $600k = 50%. 50% is more than 25%, no Reg-T margin call.

Instead, let’s say VOO drops 66%. The VOO is now worth .33*$1.2M = $408k. You still owe the brokerage $300k, so your equity is $408k - $300k = $108k. $108k / $408k ~= 26%. Whoo, just barely above 25% so no Reg-T maintenance margin call.

At 66.666% drop, you’d hit the Reg-T maintenance margin limit.


*** If you want to deduct the margin interest, see e.g. https://turbotax.intuit.com/tax-tips/in ... /L9BaPovJ4

[exodusNH]

Awesome schwab it is then. Im gonna see if Vanguard would do the same.

Vanguard is not competitive on margin. I wouldn't waste your time.

[newyorker]

Awesome schwab it is then. Im gonna see if Vanguard would do the same.

Vanguard is not competitive on margin. I wouldn't waste your time.

Thank you. I called schwab and they say they wont consider me until i open up an account. What a pain

[newyorker]

I’m really surprised by this thread. The OP asked a clear question (what’s the maintenance requirement for a margin loan at IBKR with only VOO in account) multiple times, and there’s been no direct response. Several people debating the merits of margin loans, several discussions about Schwab, only one link to IBKR.

OP:
- what type of IBKR account do you have?
- where are you a resident?
- what do you want to do with the borrowed cash? Withdraw it, or use it to buy more securities?

https://www.interactivebrokers.com/en/t ... ements.php Has all the IBKR requirements.

Assuming you’re US resident and IBKRPro account, these rules apply:
https://www.interactivebrokers.com/en/i ... 1004100808

(I’m not as familiar with IBKRLite, it’s possible the same rules apply for that account type, I didn’t check).

If you have a Reg-T Margin account you follow Reg-T margin requirements. IBKR also has something called Portfolio Margin which are higher limits.

“ Under SEC-approved Portfolio Margin rules and using our real-time margin system, our customers are able in certain cases to increase their leverage beyond Reg T margin requirements.”

For a detailed explanation of the math, see IBKRs Webinar https://www.interactivebrokers.com/en/? ... ntity%3Din

In your example, I’ll assume you are withdrawing the cash. Since money is fungible***, a way to view what you want to do is buy $1.2M of VOO with $900k cash.

Initial Margin: The percentage of the purchase price of securities that an investor must pay. Reg T calls for initial margin of up to 50%.

$300k borrowed / $1.2M total value = 25%. 25% is less than 50%, Reg-T initial margin requirement satisfied.

Maintenance Margin: The minimum amount of equity that must be maintained in the investor's margin account. Reg T calls for a maintenance margin of at least 25%.

Let’s say VOO drops 50%. The VOO is now worth 0.5*$1.2M = $600k. You still owe the brokerage $300k. So your equity is $600k - $300k = $300k.

$300k / $600k = 50%. 50% is more than 25%, no Reg-T margin call.

Instead, let’s say VOO drops 66%. The VOO is now worth .33*$1.2M = $408k. You still owe the brokerage $300k, so your equity is $408k - $300k = $108k. $108k / $408k ~= 26%. Whoo, just barely above 25% so no Reg-T maintenance margin call.

At 66.666% drop, you’d hit the Reg-T maintenance margin limit.


*** If you want to deduct the margin interest, see e.g. https://turbotax.intuit.com/tax-tips/in ... /L9BaPovJ4

You are the best! I have PRO and US resident. I plan to withdraw the money.

[newyorker]

Update

VOO only account maintenance margin at 30 percent at Schwab

[willthrill81]

300k off from 1.2M. If I make 50k/month post tax. Is it manageable?

It's possible, but it's very risky. Your odds would be similar at your nearest casino.

Hahaha.

The OP makes $600K year and wants to borrown $300K, with $1.2M in equities backing it. This does not sound very risky.

Trying to turn some 'quick cash' via a leveraged stock position does not have a very high likelihood of success, especially in a bear market.

Beyond that, the big risk for the OP is not clearly understanding how margin works, as many of the questions asked clearly demonstrate.

[irr]

If you're making $50k/mo post tax, why do you need a margin loan?

You can get a 15 year fixed mortgage at 4.8% fixed and pay it off as fast as you want.

[deanmoriarty]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

[muffins14]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

I believe no

[mayurgai]

@op thanks for starting this thread. Let us know what rate you are able to negotiate with Schwab

[jarjarM]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

Money is fungible. You can check out this link on how to deduct interest expenses as investment expenses. It's not an exact one-to-one in terms answering your question but I know ppl who's able to follow the same train of thought and turn margin loan expense into deductible interest.
Maximizing deductible interest

[CletusCaddy]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

It's even better than that, if you take the right steps, you could deduct the entire margin loan, even past $750k

[newyorker]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

It's even better than that, if you take the right steps, you could deduct the entire margin loan, even past $750k

You are like my margin jesus...

[muffins14]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

Money is fungible. You can check out this link on how to deduct interest expenses as investment expenses. It's not an exact one-to-one in terms answering your question but I know ppl who's able to follow the same train of thought and turn margin loan expense into deductible interest.
Maximizing deductible interest

Wouldn’t you need to be making some “capital improvement” to the home?

[CletusCaddy]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

It's even better than that, if you take the right steps, you could deduct the entire margin loan, even past $750k

You are like my margin jesus...

WWCCD

[JackoC]

If one uses margin to buy a personal residence, are they allowed to deduct the interest expense on their tax return, just like they would with a conventional mortgage (up to 750k etc)?

Money is fungible. You can check out this link on how to deduct interest expenses as investment expenses. It's not an exact one-to-one in terms answering your question but I know ppl who's able to follow the same train of thought and turn margin loan expense into deductible interest.
Maximizing deductible interest

That link doesn't even have the word 'margin' in my search. I agree though deductibility of margin interest has nothing do with what price of house you buy/own. The $750k limit is deductible interest on a loan secured by the house. The margin loan is secured by securities you own. There's no limit on size of deductible margin loan.

The practical limit to simplify (have been lots of threads here to search), is that the interest has to be attached to the purchase of ordinary dividend (taxable interest, rental etc) income producing securities. The amount of deducted interest can't exceed that, not counting preferred div income or municipal tax exempt (search separately for the more complicated issue with muni's if you hold a lot of them). If you have $Xmil at IBKR and withdraw $1mil on margin buy a house, the interest on that debt is not deductible. The 'right steps' to make it so will generally be to sell $1mil of securities and withdraw the money, wait 'a decent interval'*, then buy the house and take on margin debt to buy back the full original securities position. So there's quite a bit of practical 'if. You have to have ordinary div (interest) income greater than the margin interest (again muni's complicate it more look it up if relevant), and if you have only significantly appreciated securities at the broker you have to figure the cost of recognizing rather than deferring those gains v the rate advantage on margin loan (and other +/-'s).

This issue is simpler if you set up a separate LLC to own rental properties and also give it securities. The LLC can take a full business deduction of margin interest to calculate net rental income which then passes through to your tax return. I'm just noting this difference, not recommending anybody set up a sham arrangement where they pretend their own home is a rental property.

*where people can go back and forth for pages here what 'the IRS might say', invoke indefinite 'step transaction' implications the IRS has never claimed in real cases, w/ often pseudo-moralistic accusations about legal tax avoidance. Suffice it to say you must decide things like 'decent intervals' for yourself or along with your 'tax professional' who you'll be paying to also guess, the exact answer is not written down somewhere.

[whodidntante]

Can anyone tell me what is approximate percentage of margin maintenance is for S&P ETF?

Maintenance margin will depend on the broker and whether you have Reg T or portfolio (risk based) margin, and what else you own. IB Reg T should be 25%. At Fidelity, it's probably 30%. But there is no need to guess. The answer is on their website.

OP, go ahead and do this if you have a handle on the risks and are OK with it. This forum equates margin with gambling or financial suicide. It's not, or at least it doesn't need to be. Maybe that market timer leverage thread spooked everybody.