by John Bruggemann, CFP

Many clients have a need for financing for various reasons- a large purchase such as a new automobile,  a real estate transaction or business needs, to name a few. What many clients do not realize is the ease in which a client can access cash using their taxable investment account as collateral.

While margin loans are a common way to borrow against an investment account, margin rates are quite high, currently 6.45% or more. Depending on the custodian, our clients can arrange for a ‘non-purpose loan’ through a traditional bank using their investment account as collateral. The proceeds from the loan cannot be used to purchase, carry or trade securities, but can be used for anything else. The current rate for this line of credit is set to a credit spread over the monthly LIBOR rate, which is currently .16%, or 16 basis points. The spread starts at 2.5%, and moves a bit lower as the size of the loan increases.

The loan minimum is $100,000, and clients can borrow up to 70% of the value of the marketable securities in their portfolio. Interest must be repaid monthly, but the principal repayment can be stretched out over time. The obvious risk is a market downturn may require additional collateral, or repayment of amounts borrowed to be accelerated.

Why would a client consider this type of loan? Assume a client is downsizing, and is in the process of selling their current home. This client can use his or her investment account to have available the funds needed to purchase their new home, avoiding the need to sell their current home before purchasing the new home. Arranging a line of credit is the most cost-efficient and easiest path to obtaining short-term financing. Underwriting is not required for this type of loan, but the client will need to have a credit score of 680 or greater to qualify. With a taxable account of $725,000, a client can access $500,000 with a loan rate currently at 2.41%. A traditional margin loan rate for a similar size loan would be 6.45%.

I would recommend this financing option to any client who has a short term financing need. The rates are competitive, the process is relatively simple and the client can unlock liquidity without selling securities and possibly avoiding unwanted capital gains. Any taxable account can be used as collateral- individual, joint tenant and trusts- and the client has the ability to link multiple registrations.  In addition, this line of credit can be easily converted into a more traditional loan should the client desire to do so.

Feel free to contact your ACM financial advisor for more information.

ACM is a registered investment advisory firm with the United States Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. All written content on this site is for information purposes only. Opinions expressed herein are solely those of ACM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful. ©ACM Wealth

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