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Asset-based lending?


berkshire101
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I'm not sure if the subject title is the correct term to use.  Hopefully someone can shed some light on the matter.

 

At my weekly toastmasters meeting, the speaker (who is a financial advisor with Merrill Lynch) gave a presentation about his job.  He spoke about a product that his firm offers that not a lot of people have heard of.

 

Basically, if you have investments (such as stocks) worth say $500k, you can take a loan against it to buy say a house, car, vacation, start a business, etc.  It's equivalent to getting a mortgage and you make monthly payments.  He said this way, you don't have to sell your investments.  Rather, you can let it grow and use your earned income to pay the loan.  You get to determine the duration of the loan.  Some people get a 20-year loan to buy a house.  And the interest rate is tied to Libor.  It seems like you're getting a mortgage to buy whatever you want with.  Also, the loan isn't reported to the credit bureaus so it won't show up on your credit history.  You can go to a bank and still get a traditional loan.

 

Has anyone heard of such a product?  I'm not sure what the correct term is.  It would be cool if you could get a 30-year fixed mortgage at today's interest to buy stocks. 

 

I asked for his business card so I'll probably give him a call soon.

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What are the differences between this and a margin loan?

 

Well... a margin loan is callable.  So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities.  This loan is too.  But there's a duration on when it's callable.  So it's more predictable, and the interest rate is tied to Libor.  I think my brokerage is asking like 8-10% interest on a margin account.

 

I'm not expert on this.  That's what I got from the short 10 minute speech.

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What are the differences between this and a margin loan?

 

Well... a margin loan is callable.  So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities.  This loan is too.  But there's a duration on when it's callable.  So it's more predictable, and the interest rate is tied to Libor.  I think my brokerage is asking like 8-10% interest on a margin account.

 

I'm not expert on this.  That's what I got from the short 10 minute speech.

 

This is very interesting. Please let me know what you find out.

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Guest Schwab711

I've done this with M&T and I'm a huge fan of this financing. Cheapest financing available and the non-callable term features are essential for me to take on leverage.

 

For those interested, behind the scenes is generally a Repo transaction with the bank so they earn fees + interest.

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I've done this with M&T and I'm a huge fan of this financing. Cheapest financing available and the non-callable term features are essential for me to take on leverage.

 

For those interested, behind the scenes is generally a Repo transaction with the bank so they earn fees + interest.

 

Did you use this to add leverage to your investment portfolio?  I don't keep a huge cash balance in my portfolio.  So if there is a significant decline, having this financing available would be a great source!

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What are the differences between this and a margin loan?

 

Well... a margin loan is callable.  So if your investments decline significantly and you can't meet the margin call then you'll be force to sell your securities.  This loan is too.  But there's a duration on when it's callable.  So it's more predictable, and the interest rate is tied to Libor.  I think my brokerage is asking like 8-10% interest on a margin account.

 

I'm not expert on this.  That's what I got from the short 10 minute speech.

 

I wouldn't compare it to the margin rate at a typical retail broker. Using margin at any retail brokerage except for Interactive Brokers is clearly a terrible idea.

 

For low balances, IB margin is about 1.62% while Schwab PAL is about 3.67% (varying based on the benchmark and the amount). Margin is cheaper because they have easier access to your collateral to protect the value of their loan.

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Can you all provide a little more detail on how you are able to avoid the possibility of a margin call with this? Maybe those who've used it (Schwab) can provide a little more detail on the collateral requirements (ie what % of NAV was borrowed, what restrictions in terms of concentration were put on account, etc. etc.)

 

I don't understand why banks would take the risks of lending serious $ without being able to liquidate your portfolio if it fell in value. It just sounds too good to be true to be able to borrow against securities, but not have to worry about them going down in value. Sorry if I'm missing something obvious here.

 

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So quick update.  I talked to my financial advisor friend.  The product is called a loan management account.  I scheduled a meeting for next week to discuss the matter more indepth.

 

Basically, the advantage of getting a 30-year mortgage is that even though your house may significantly decline in value, if you can still make the payments then you're not force to sell the house.  So if I could get financing on those terms for investments then it would be ideal.  With a typical margin account, most sell securities to pay back the margin.  Since I have a taxable account and don't want to take a tax gain hit, making monthly payments to pay off the loan would solve that problem.  I think.

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So quick update.  I talked to my financial advisor friend.  The product is called a loan management account.  I scheduled a meeting for next week to discuss the matter more indepth.

 

Basically, the advantage of getting a 30-year mortgage is that even though your house may significantly decline in value, if you can still make the payments then you're not force to sell the house.  So if I could get financing on those terms for investments then it would be ideal.  With a typical margin account, most sell securities to pay back the margin.  Since I have a taxable account and don't want to take a tax gain hit, making monthly payments to pay off the loan would solve that problem.  I think.

 

It sounds  really interesting. let us know how it goes.

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It says right in the first link that they can liquidate the positions for you and you have no control over what they sell.  You are also required to post more collateral if the value of the assets go down in value

 

Read the section titled "Understanding risks associated with your LMA account"

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It says right in the first link that they can liquidate the positions for you and you have no control over what they sell.  You are also required to post more collateral if the value of the assets go down in value

 

Read the section titled "Understanding risks associated with your LMA account"

 

Yes, I saw that.  A mortgage is callable too if the lender deems that you are no longer qualify to meet the required obligations.  It's a safety measure the lender usually states upfront.  That's something I'll clarify at the meeting.  I don't plan to leverage 100% of my portfolio.  At most, it's 25%.  So my portfolio has to drop 75% before I'll start to have a margin call. 

 

I'm more interested in having the ability to define the loan duration and the fixed-rate option for the monthly payments.  Hopefully it's not too good to be true.

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Are Canadian brokers into this "game"? I'm considering a new car purchase and rather than selling securities in a taxable account I'm considering a Scotiabank car loan at 3.99 percent. So are there Canadian brokers offering a significantly lower rate on securities backed loans?

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It says right in the first link that they can liquidate the positions for you and you have no control over what they sell.  You are also required to post more collateral if the value of the assets go down in value

 

Read the section titled "Understanding risks associated with your LMA account"

 

Yes, I saw that.  A mortgage is callable too if the lender deems that you are no longer qualify to meet the required obligations.  It's a safety measure the lender usually states upfront.  That's something I'll clarify at the meeting.  I don't plan to leverage 100% of my portfolio.  At most, it's 25%.  So my portfolio has to drop 75% before I'll start to have a margin call. 

 

I'm more interested in having the ability to define the loan duration and the fixed-rate option for the monthly payments.  Hopefully it's not too good to be true.

 

Most mortgages are not callable.  Seconds (HELOCs) often are. 

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  • 3 weeks later...

One of the homies @ the cigar bar, said his brokerage account will have a 2.5% fixed rate pledge loan against his brokerage assets.

 

He's going to use it buy shares in private businesses yielding 10-11%, paying dividends of 5-6%.

 

Its just another financial engineering (arbitrage spread) game.

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