Using IB margin to pay off mortgage

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michaeljc70
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Using IB margin to pay off mortgage

Post by michaeljc70 »

If I use an IB Pro margin loan (rate is 1.59% floating) to payoff my mortgage ($100k), what would be a safe threshold for borrowing in your view? 30% of the account value? Will I be hit with any other fees other than the $10 per month? I used them years ago and I remember being hit for some market data service if I didn't opt out. I make only a handful of trades a year and they are ETFs (3 fund portfolio). My mortgage is 3.375% currently. Any other advise?
petulant
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Re: Using IB margin to pay off mortgage

Post by petulant »

Do you have any bonds in your brokerage account? Could you sell the bonds and pay off your mortgage, allowing you to carry a more aggressive stock allocation?

Maintenance margin at IBKR is 25%. That means IBKR will start to sell your securities when the remaining equity is less than 25% of remaining assets. So if you take out a margin loan up to 50% of assets and withdraw to pay down the mortgage, stocks only need to drop 33% before they start selling. If you want a formula that takes the drop in stocks you want to happen before the margin call hits and tells you how much of a % in assets you could take as a margin loan, here you go: (3/4)*(D-1), where D is the maximum drawdown as a positive number. For example, if you don't want a margin call before stocks drop 75%, it's (3/4)*(.75-1)=-.1875, or 18.75% of the starting assets can be removed as a margin loan.
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michaeljc70
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Re: Using IB margin to pay off mortgage

Post by michaeljc70 »

petulant wrote: Mon Jul 27, 2020 10:01 am Do you have any bonds in your brokerage account? Could you sell the bonds and pay off your mortgage, allowing you to carry a more aggressive stock allocation?

Maintenance margin at IBKR is 25%. That means IBKR will start to sell your securities when the remaining equity is less than 25% of remaining assets. So if you take out a margin loan up to 50% of assets and withdraw to pay down the mortgage, stocks only need to drop 33% before they start selling. If you want a formula that takes the drop in stocks you want to happen before the margin call hits and tells you how much of a % in assets you could take as a margin loan, here you go: (3/4)*(D-1), where D is the maximum drawdown as a positive number. For example, if you don't want a margin call before stocks drop 75%, it's (3/4)*(.75-1)=-.1875, or 18.75% of the starting assets can be removed as a margin loan.
Thanks for the response. My bonds are all in retirement accounts.
bryanm
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Re: Using IB margin to pay off mortgage

Post by bryanm »

michaeljc70 wrote: Mon Jul 27, 2020 10:05 am My bonds are all in retirement accounts.
Why not swap the bonds in the retirement accounts for stock, and sell stock in taxable to pay off the mortgage? Otherwise the end result is that you're leveraging stocks in one account while holding bonds in the other. That strategy seems odd to me, as I don't really understand it.
RocketShipTech
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Re: Using IB margin to pay off mortgage

Post by RocketShipTech »

I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
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whodidntante
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Re: Using IB margin to pay off mortgage

Post by whodidntante »

If you are considering this, then you have a large taxable account. Those of us following the bouncing ball did TLH in March, so maybe you did that, too. If so, you possibly have booked significant capital losses. Now, one could take that at 3k a year off regular income for a long time, or one could sell enough stock to pay off the mortgage, and then restore equity exposure using equity index futures. The advantage would be the lower rate. You'll get RFR + 0% on futures instead of RFR + 1.5% on a small IB margin balance. Another advantage is the interest cost is baked in, and comes off your gains regardless of your tax situation. Risk of forced liquidated is generally lower with futures for a given leverage ratio. Something to think about.
alex_686
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Re: Using IB margin to pay off mortgage

Post by alex_686 »

While I am mildly in favor using leverage with a mortgage, I am against mildly against this.

What is your current interest rate? How many years left of it? What is your long term plan for your debt and portfolio. You are swapping a fix rate loan for a floating rate. As such, you are picking up interest rate risk. I have a hard time justifying this rationally.

Also note that the brokerage can sell you out at any point for any reason. They can sell first and notify you latter. It does not matter what IB says. The rules are structured that the brokerage must protect itself first and that the brokerage can suspend many of the rules during times of high volatility.

I used to work on the margin desk. There are a fair number of behavioral problems. During calm times people forget the risk that is involved and leverage up - either on purpose or by accident. During times of chaos both people and markets become irrational. During the last
round of chaos in this V market you might have been forced to sell and the bottom. Would you be o.k. with that?
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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crystalbank
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Re: Using IB margin to pay off mortgage

Post by crystalbank »

whodidntante wrote: Mon Jul 27, 2020 11:13 am If you are considering this, then you have a large taxable account. Those of us following the bouncing ball did TLH in March, so maybe you did that, too. If so, you possibly have booked significant capital losses. Now, one could take that at 3k a year off regular income for a long time, or one could sell enough stock to pay off the mortgage, and then restore equity exposure using equity index futures. The advantage would be the lower rate. You'll get RFR + 0% on futures instead of RFR + 1.5% on a small IB margin balance. Another advantage is the interest cost is baked in, and comes off your gains regardless of your tax situation. Risk of forced liquidated is generally lower with futures for a given leverage ratio. Something to think about.
Wouldn't this create more tax drag? The futures have to be rolled periodically generating significant taxable income (i.e. if market goes up)?
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crystalbank
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Re: Using IB margin to pay off mortgage

Post by crystalbank »

RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
This is a great strategy, if you have sizable taxable equity holdings without much capital gains if you sell them.
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whodidntante
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Re: Using IB margin to pay off mortgage

Post by whodidntante »

crystalbank wrote: Mon Jul 27, 2020 11:33 am
whodidntante wrote: Mon Jul 27, 2020 11:13 am If you are considering this, then you have a large taxable account. Those of us following the bouncing ball did TLH in March, so maybe you did that, too. If so, you possibly have booked significant capital losses. Now, one could take that at 3k a year off regular income for a long time, or one could sell enough stock to pay off the mortgage, and then restore equity exposure using equity index futures. The advantage would be the lower rate. You'll get RFR + 0% on futures instead of RFR + 1.5% on a small IB margin balance. Another advantage is the interest cost is baked in, and comes off your gains regardless of your tax situation. Risk of forced liquidated is generally lower with futures for a given leverage ratio. Something to think about.
Wouldn't this create more tax drag? The futures have to be rolled periodically generating significant taxable income (i.e. if market goes up)?
Correct. My assumption is that OP has significant capital losses to work with. But also sometimes markets go down, which would result in booking further capital losses. I'm also assuming the OP will deleverage, which can be done through buying equity index ETFs and gradually reducing the number of futures contracts. Furthermore, tax deferred is not necessarily tax avoided or tax reduced. In some situations, people are better off paying taxes now and pay less tax over their lifetime this way.
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michaeljc70
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Re: Using IB margin to pay off mortgage

Post by michaeljc70 »

bryanm wrote: Mon Jul 27, 2020 11:03 am
michaeljc70 wrote: Mon Jul 27, 2020 10:05 am My bonds are all in retirement accounts.
Why not swap the bonds in the retirement accounts for stock, and sell stock in taxable to pay off the mortgage? Otherwise the end result is that you're leveraging stocks in one account while holding bonds in the other. That strategy seems odd to me, as I don't really understand it.
I'm retired and use the taxable funds to pay all my expenses. I could use all my taxable to pay off the mortgage. Then I need to find money to live off which would require starting a 72t plan on my IRA (I'm 50 yo). That will be considered income and affect ACA subsidies. Or go back to work which probably isn't going to happen.
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michaeljc70
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Re: Using IB margin to pay off mortgage

Post by michaeljc70 »

RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
I don't itemize any longer.
Goal33
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Re: Using IB margin to pay off mortgage

Post by Goal33 »

I'd only feel comfortable if the percentage was negligible. Say, 15%-20%... this is arbitrary percentage that I've made up, however.

I would only do this as a "bridge", assuming you're going to pay off at some point in the reasonably near future (less than 5 years), as interest rates do fluctuate...
SQRT
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Re: Using IB margin to pay off mortgage

Post by SQRT »

As someone who had a 7 figure margin loan in 2008, I wouldn’t do this. Although I didn’t receive a margin call, it worried me, so I put helocs on some of my real estate for insurance. Maybe if your margin loans were under 20% (as someone else posted) I might feel comfortable. But in the end how much do you save? Doesn’t seem worth it to me.
mjb
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Re: Using IB margin to pay off mortgage

Post by mjb »

michaeljc70 wrote: Mon Jul 27, 2020 10:05 am
petulant wrote: Mon Jul 27, 2020 10:01 am Do you have any bonds in your brokerage account? Could you sell the bonds and pay off your mortgage, allowing you to carry a more aggressive stock allocation?

Maintenance margin at IBKR is 25%. That means IBKR will start to sell your securities when the remaining equity is less than 25% of remaining assets. So if you take out a margin loan up to 50% of assets and withdraw to pay down the mortgage, stocks only need to drop 33% before they start selling. If you want a formula that takes the drop in stocks you want to happen before the margin call hits and tells you how much of a % in assets you could take as a margin loan, here you go: (3/4)*(D-1), where D is the maximum drawdown as a positive number. For example, if you don't want a margin call before stocks drop 75%, it's (3/4)*(.75-1)=-.1875, or 18.75% of the starting assets can be removed as a margin loan.
Thanks for the response. My bonds are all in retirement accounts.
Note that overnight rates are 50% per reg t
inbox788
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Re: Using IB margin to pay off mortgage

Post by inbox788 »

bryanm wrote: Mon Jul 27, 2020 11:03 am
michaeljc70 wrote: Mon Jul 27, 2020 10:05 am My bonds are all in retirement accounts.
Why not swap the bonds in the retirement accounts for stock, and sell stock in taxable to pay off the mortgage? Otherwise the end result is that you're leveraging stocks in one account while holding bonds in the other. That strategy seems odd to me, as I don't really understand it.
Well, that depends on the rates you're paying and getting. If you're paying less than 2% and getting 3%, why not? You are taking risk, but not as much as if you were borrowing to invest in stocks, which is what might be going on if you're not keeping track of everything. As long as markets keep beating bonds and they keep beating mortgage, you won't notice. Just have a plan when they don't.

OP, what's your AA? Do you have cash, CDs, life insurance, annuities, or other fixed income? Are they netting > 1.59%? How long before you payoff the mortgage? I'd work towards simplifying life over a small benefit, especially if it adds risk.
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whodidntante
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Re: Using IB margin to pay off mortgage

Post by whodidntante »

SQRT wrote: Mon Jul 27, 2020 2:20 pm As someone who had a 7 figure margin loan in 2008, I wouldn’t do this. Although I didn’t receive a margin call, it worried me, so I put helocs on some of my real estate for insurance. Maybe if your margin loans were under 20% (as someone else posted) I might feel comfortable. But in the end how much do you save? Doesn’t seem worth it to me.
Interesting. I'm not familiar with your story. Did you do this before or in response to the market drop in '07 and '08?
TropikThunder
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Re: Using IB margin to pay off mortgage

Post by TropikThunder »

michaeljc70 wrote: Mon Jul 27, 2020 12:04 pm
RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
I don't itemize any longer.
Your mortgage interest is already deductible if you itemize, so this isn’t really a benefit anyway (yes the interest is lower, but it’s not like one is deductible and the other isn’t).
saver007
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Re: Using IB margin to pay off mortgage

Post by saver007 »

If you are going to do it, it will be better to do it via IB portfolio margin account as long as your portfolio is not made up of individual stocks.

Is your portfolio made up of broad based index ETFs like VTI?

Will your equity after loan ( assets - loan ) still much greater than the minimum 100k equity needed for portfolio margin account? You should have huge cushion like 200k+ equity after the loan.

If so, I will be comfortable talking may be 25% of the equity as loan.

portfolio margin requirement for broad based index products like VTI is very low like 8 to 10%. In case of extreme risk you can buy put options to derisk the portfolio which will reduce margin requirements.
alex_686
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Re: Using IB margin to pay off mortgage

Post by alex_686 »

mjb wrote: Mon Jul 27, 2020 5:30 pm Note that overnight rates are 50% per reg t
Reg T, if I remember correctly, is the initial margin requirement per the Federal Reserve. And that is only specific to the Special Memorandum Accounts (SMA).

After that, it no longer controls. Then exchange and broker requirements kick in, which are much more liberal.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
RocketShipTech
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Re: Using IB margin to pay off mortgage

Post by RocketShipTech »

TropikThunder wrote: Mon Jul 27, 2020 5:56 pm
michaeljc70 wrote: Mon Jul 27, 2020 12:04 pm
RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
I don't itemize any longer.
Your mortgage interest is already deductible if you itemize, so this isn’t really a benefit anyway (yes the interest is lower, but it’s not like one is deductible and the other isn’t).
Margin interest is not tax-deductible unless it is used to purchase investments - home equity doesn't count as an investment in this case.
SovereignInvestor
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Re: Using IB margin to pay off mortgage

Post by SovereignInvestor »

I would recommend against it since broker can call in theory at any time and ruin your life.

If one insists then do risk is mitigated with using low leverage maybe 20% max, and maybe buy way OTM index put options out 2 or 3 years and keep rolling. Make the strike a bit higher than where you'd get a margin call. The cost of puts are deductible if they go worthless and adds to the effective interest rate as a cost of borrowing in a small way, and if they are ITM then they save you from insolvency
kxl19
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Re: Using IB margin to pay off mortgage

Post by kxl19 »

RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
But isn't the deductability of margin interest only limited to investment income (dividends, interest, rental income)? If you have mainly index funds that pay mostly qualified dividends, there'd be less opportunity to deduct against those, and interest income on cash is pretty much non-existent now.
RocketShipTech
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Re: Using IB margin to pay off mortgage

Post by RocketShipTech »

kxl19 wrote: Mon Jul 27, 2020 10:05 pm
RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
But isn't the deductability of margin interest only limited to investment income (dividends, interest, rental income)? If you have mainly index funds that pay mostly qualified dividends, there'd be less opportunity to deduct against those, and interest income on cash is pretty much non-existent now.
Qualified dividends are still taxed. My QDI tax rate is 33%.
AlohaJoe
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Re: Using IB margin to pay off mortgage

Post by AlohaJoe »

michaeljc70 wrote: Mon Jul 27, 2020 9:28 am Will I be hit with any other fees other than the $10 per month?
The $10/month fee only applies on accounts under $100,000. It sounds like your account is bigger than that. I don't pay any monthly fees at IBKR.
babystep
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Re: Using IB margin to pay off mortgage

Post by babystep »

RocketShipTech wrote: Mon Jul 27, 2020 10:07 pm
kxl19 wrote: Mon Jul 27, 2020 10:05 pm
RocketShipTech wrote: Mon Jul 27, 2020 11:05 am I would try to make the margin interest tax-deductible by:

1. Pay off the mortgage with cash on hand or taxable investments.
2. Use margin loan to replace those investments.
3. Margin loan interest is now deductible.

Assuming you itemize.
But isn't the deductability of margin interest only limited to investment income (dividends, interest, rental income)? If you have mainly index funds that pay mostly qualified dividends, there'd be less opportunity to deduct against those, and interest income on cash is pretty much non-existent now.
Qualified dividends are still taxed. My QDI tax rate is 33%.
The qualified dividends and long-term capital gains don't qualify for investment interest expense deduction.
VCC
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Re: Using IB margin to pay off mortgage

Post by VCC »

You can opt to have the qualified dividends considered ordinary income & deduct the whole thing.
babystep
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Re: Using IB margin to pay off mortgage

Post by babystep »

michaeljc70 wrote: Mon Jul 27, 2020 9:28 am If I use an IB Pro margin loan (rate is 1.59% floating) to payoff my mortgage ($100k), what would be a safe threshold for borrowing in your view? 30% of the account value? Will I be hit with any other fees other than the $10 per month? I used them years ago and I remember being hit for some market data service if I didn't opt out. I make only a handful of trades a year and they are ETFs (3 fund portfolio). My mortgage is 3.375% currently. Any other advise?
I would use the recent drop of 32% in March as guidance. So agree with your 30% number.

How many years of mortgage is remaining? What is the plan to pay-off the IB margin loan? Sounds like a great idea if it is not going to last more than couple of years.
babystep
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Re: Using IB margin to pay off mortgage

Post by babystep »

VCC wrote: Mon Jul 27, 2020 10:57 pm You can opt to have the qualified dividends considered ordinary income & deduct the whole thing.
Great point. Thanks. Can you do it partially? Say interest is 10k and you have QDI of 30k, can you make 10k ordinary and remaining 20k as QDI?
saver007
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Re: Using IB margin to pay off mortgage

Post by saver007 »

OP may want to look into opening IB account via stockbrokers.com. there was a special promotion where first tier margin rate can be skipped.. so basically start borrowing at 1.09% instead of 1.59%. I am not sure if this deal is still on though. https://www.stockbrokers.com/review/interactivebrokers
VCC
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Re: Using IB margin to pay off mortgage

Post by VCC »

babystep wrote: Mon Jul 27, 2020 11:02 pm
VCC wrote: Mon Jul 27, 2020 10:57 pm You can opt to have the qualified dividends considered ordinary income & deduct the whole thing.
Great point. Thanks. Can you do it partially? Say interest is 10k and you have QDI of 30k, can you make 10k ordinary and remaining 20k as QDI?
Yes. Refer to IRS Form 4952.
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michaeljc70
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Re: Using IB margin to pay off mortgage

Post by michaeljc70 »

To answer a few questions above:

-My AA is 70/30.
-I have 6 years left on the mortgage
-My investments are all TSM, BND and similar.
-I've actually been doing capital gain harvesting, not capital loss harvesting since the gains are not taxable federally (income <79k MFJ). It does hit the ACA subsidy though a little.

I currently don't have enough in taxable to comfortably get a margin loan and payoff the whole mortgage. It seems like it may not be worth it to partially do this. Another factor is I am thinking of doing an IRA withdrawal under the CARES act (there is another thread on that) but I don't think it would be wise to pull enough to pay off the mortgage (due to ACA subsidy loss and income taxes).
SQRT
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Re: Using IB margin to pay off mortgage

Post by SQRT »

whodidntante wrote: Mon Jul 27, 2020 5:54 pm
SQRT wrote: Mon Jul 27, 2020 2:20 pm As someone who had a 7 figure margin loan in 2008, I wouldn’t do this. Although I didn’t receive a margin call, it worried me, so I put helocs on some of my real estate for insurance. Maybe if your margin loans were under 20% (as someone else posted) I might feel comfortable. But in the end how much do you save? Doesn’t seem worth it to me.
Interesting. I'm not familiar with your story. Did you do this before or in response to the market drop in '07 and '08?
I retired in 2006. On retirement, I repaid some employee loans with margin loans. Also had big employee options positions that ran until 2012 with which gains I had intended to repay the margin loans. By early 2009 my options were all under water but I still had the loans. My total portfolio declined by about 75%(Including options, loans) during this period but by late 2009 all was restored. Paid loans off with option gains over next year or two. I vowed to be debt free for the rest of my life.
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michaeljc70
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Re: Using IB margin to pay off mortgage

Post by michaeljc70 »

inbox788 wrote: Mon Jul 27, 2020 5:43 pm
bryanm wrote: Mon Jul 27, 2020 11:03 am
michaeljc70 wrote: Mon Jul 27, 2020 10:05 am My bonds are all in retirement accounts.
Why not swap the bonds in the retirement accounts for stock, and sell stock in taxable to pay off the mortgage? Otherwise the end result is that you're leveraging stocks in one account while holding bonds in the other. That strategy seems odd to me, as I don't really understand it.
Well, that depends on the rates you're paying and getting. If you're paying less than 2% and getting 3%, why not? You are taking risk, but not as much as if you were borrowing to invest in stocks, which is what might be going on if you're not keeping track of everything. As long as markets keep beating bonds and they keep beating mortgage, you won't notice. Just have a plan when they don't.

OP, what's your AA? Do you have cash, CDs, life insurance, annuities, or other fixed income? Are they netting > 1.59%? How long before you payoff the mortgage? I'd work towards simplifying life over a small benefit, especially if it adds risk.
AA is 70/30. All FI is in BND. Maybe I am overthinking this. My mortgage at 3.375% is pretty low. You would think that you are earning almost nothing in BND and sell it and use it to pay off the mortgage but the returns for YTD, 1 yr , 3 yr and 5 yr are 6.4%, 9.1%, 5.4% and 4.4% respectfully. Of course that isn't guaranteed and no one knows what it will do going forward.
petulant
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Re: Using IB margin to pay off mortgage

Post by petulant »

michaeljc70 wrote: Tue Jul 28, 2020 10:24 am
inbox788 wrote: Mon Jul 27, 2020 5:43 pm
bryanm wrote: Mon Jul 27, 2020 11:03 am
michaeljc70 wrote: Mon Jul 27, 2020 10:05 am My bonds are all in retirement accounts.
Why not swap the bonds in the retirement accounts for stock, and sell stock in taxable to pay off the mortgage? Otherwise the end result is that you're leveraging stocks in one account while holding bonds in the other. That strategy seems odd to me, as I don't really understand it.
Well, that depends on the rates you're paying and getting. If you're paying less than 2% and getting 3%, why not? You are taking risk, but not as much as if you were borrowing to invest in stocks, which is what might be going on if you're not keeping track of everything. As long as markets keep beating bonds and they keep beating mortgage, you won't notice. Just have a plan when they don't.

OP, what's your AA? Do you have cash, CDs, life insurance, annuities, or other fixed income? Are they netting > 1.59%? How long before you payoff the mortgage? I'd work towards simplifying life over a small benefit, especially if it adds risk.
AA is 70/30. All FI is in BND. Maybe I am overthinking this. My mortgage at 3.375% is pretty low. You would think that you are earning almost nothing in BND and sell it and use it to pay off the mortgage but the returns for YTD, 1 yr , 3 yr and 5 yr are 6.4%, 9.1%, 5.4% and 4.4% respectfully. Of course that isn't guaranteed and no one knows what it will do going forward.
Honestly my vote would be to reduce bonds in tax-advantaged account, then sell stocks in taxable account to pay off mortgage.
JackoC
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Re: Using IB margin to pay off mortgage

Post by JackoC »

babystep wrote: Mon Jul 27, 2020 10:57 pm
michaeljc70 wrote: Mon Jul 27, 2020 9:28 am If I use an IB Pro margin loan (rate is 1.59% floating) to payoff my mortgage ($100k), what would be a safe threshold for borrowing in your view? 30% of the account value? Will I be hit with any other fees other than the $10 per month? I used them years ago and I remember being hit for some market data service if I didn't opt out. I make only a handful of trades a year and they are ETFs (3 fund portfolio). My mortgage is 3.375% currently. Any other advise?
I would use the recent drop of 32% in March as guidance. So agree with your 30% number.

How many years of mortgage is remaining? What is the plan to pay-off the IB margin loan? Sounds like a great idea if it is not going to last more than couple of years.
Post after post disagreeing with the idea don't take note of that %. Same as every time margin borrowing is mentioned here. As if likelihood of margin calls did not depend on the amount of borrowing. :?
IBKR allows basically 75% borrowing under 'portfolio margin', so a 30% loan will have enough collateral till stocks go down 60% from current level. Assuming that is the same terms by IBKR, they can change them. But as you suggest with a 32% drop stocks like earlier this year would only make a 30% loan into 44% loan. Nothing is ever for absolute certain but 30% margin borrowing with IBKR is pretty safe I agree, and I think even if it wasn't going to be paid down in only a couple of years.

Tax is more complicated; various posts have touched on pieces of it but not every aspect, and 'every aspect' depends individual situation. I think OP said didn't itemize so then neither mortgage nor margin loan interest are deductible and it's just 1.6% v. 3.375%, though with due regard to the mortgage rate being fixed and margin rate floating off Fed Funds which can go up, and IBKR's spread could widen also, though both the 75% borrowing and general spread level have been similar at IBKR for years.

Or both might be fully deductible, but there are cases where margin interest could be less fully deductible than mortgage. The two already mentioned are 1) that you can't deduct interest on mortgage loans where the proceeds are used for personal expenses (including houses, including paying down mortgages). You have to maneuver it so that the mortgage gets paid down by liquidating investment assets, then new investment assets are purchased with proceeds of the margin loan. And 2) assuming you can do that, the margin interest is still only deductible to the extent of ordinary investment income (interest, non-qual div, short term cg); although you can elect to have qual div and long term cg income counted and taxed as ordinary if that helps but it often would not. The third limit I didn't see mentioned and probably isn't relevant here is municipal bonds. A recent thread gave a good reference backing up the idea that any proportion of muni bonds in portfolio limit the deduction pro-rata, eg. if 10% of your investment assets are muni's, margin loans are only 90% deductible even if the first two limits don't apply. But if OP doesn't itemize at all...
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Using IB margin to pay off mortgage

Post by petulant »

JackoC wrote: Tue Jul 28, 2020 4:06 pm
babystep wrote: Mon Jul 27, 2020 10:57 pm
michaeljc70 wrote: Mon Jul 27, 2020 9:28 am If I use an IB Pro margin loan (rate is 1.59% floating) to payoff my mortgage ($100k), what would be a safe threshold for borrowing in your view? 30% of the account value? Will I be hit with any other fees other than the $10 per month? I used them years ago and I remember being hit for some market data service if I didn't opt out. I make only a handful of trades a year and they are ETFs (3 fund portfolio). My mortgage is 3.375% currently. Any other advise?
I would use the recent drop of 32% in March as guidance. So agree with your 30% number.

How many years of mortgage is remaining? What is the plan to pay-off the IB margin loan? Sounds like a great idea if it is not going to last more than couple of years.
Post after post disagreeing with the idea don't take note of that %. Same as every time margin borrowing is mentioned here. As if likelihood of margin calls did not depend on the amount of borrowing. :?
IBKR allows basically 75% borrowing under 'portfolio margin', so a 30% loan will have enough collateral till stocks go down 60% from current level. Assuming that is the same terms by IBKR, they can change them. But as you suggest with a 32% drop stocks like earlier this year would only make a 30% loan into 44% loan. Nothing is ever for absolute certain but 30% margin borrowing with IBKR is pretty safe I agree, and I think even if it wasn't going to be paid down in only a couple of years.

Tax is more complicated; various posts have touched on pieces of it but not every aspect, and 'every aspect' depends individual situation. I think OP said didn't itemize so then neither mortgage nor margin loan interest are deductible and it's just 1.6% v. 3.375%, though with due regard to the mortgage rate being fixed and margin rate floating off Fed Funds which can go up, and IBKR's spread could widen also, though both the 75% borrowing and general spread level have been similar at IBKR for years.

Or both might be fully deductible, but there are cases where margin interest could be less fully deductible than mortgage. The two already mentioned are 1) that you can't deduct interest on mortgage loans where the proceeds are used for personal expenses (including houses, including paying down mortgages). You have to maneuver it so that the mortgage gets paid down by liquidating investment assets, then new investment assets are purchased with proceeds of the margin loan. And 2) assuming you can do that, the margin interest is still only deductible to the extent of ordinary investment income (interest, non-qual div, short term cg); although you can elect to have qual div and long term cg income counted and taxed as ordinary if that helps but it often would not. The third limit I didn't see mentioned and probably isn't relevant here is municipal bonds. A recent thread gave a good reference backing up the idea that any proportion of muni bonds in portfolio limit the deduction pro-rata, eg. if 10% of your investment assets are muni's, margin loans are only 90% deductible even if the first two limits don't apply. But if OP doesn't itemize at all...
Literally the first reply in the thread was me talking about the relevant percentages and even giving the OP a formula for framing how much loan he can take versus the amount of drop that would trigger a margin call. He later said the balance wasn't large enough to pay off the loan in a percentage he's comfortable with. No need to act like there's groupthink when the actual merits were reviewed.
JackoC
Posts: 1865
Joined: Sun Aug 12, 2018 11:14 am

Re: Using IB margin to pay off mortgage

Post by JackoC »

petulant wrote: Tue Jul 28, 2020 7:38 pm
JackoC wrote: Tue Jul 28, 2020 4:06 pm
babystep wrote: Mon Jul 27, 2020 10:57 pm
michaeljc70 wrote: Mon Jul 27, 2020 9:28 am If I use an IB Pro margin loan (rate is 1.59% floating) to payoff my mortgage ($100k), what would be a safe threshold for borrowing in your view? 30% of the account value? Will I be hit with any other fees other than the $10 per month? I used them years ago and I remember being hit for some market data service if I didn't opt out. I make only a handful of trades a year and they are ETFs (3 fund portfolio). My mortgage is 3.375% currently. Any other advise?
I would use the recent drop of 32% in March as guidance. So agree with your 30% number.

How many years of mortgage is remaining? What is the plan to pay-off the IB margin loan? Sounds like a great idea if it is not going to last more than couple of years.
Post after post disagreeing with the idea don't take note of that %. Same as every time margin borrowing is mentioned here. As if likelihood of margin calls did not depend on the amount of borrowing. :?
Literally the first reply in the thread was me talking about the relevant percentages and even giving the OP a formula for framing how much loan he can take versus the amount of drop that would trigger a margin call. He later said the balance wasn't large enough to pay off the loan in a percentage he's comfortable with. No need to act like there's groupthink when the actual merits were reviewed.
A bunch of posts after that reverted to the usual script. No, not all posts on margin topics are like that, but there's always a bunch if the thread goes on at all 'margin call!, panic!! :D
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