You've probably heard of margin loans, but do you know about investment lines of credit (ICLs)? Like margin loans, ICLs are backed by the assets in your portfolio but are used for non-securities investments—meaning you can't use them to buy stocks and bonds. In my experience, ICLs also tend to be cheaper and offer higher loans relative to account value.
If you've been looking at mortgages, home equity lines of credit, or business financing, you should take a look. Depending on your personal financial situation, ICLs can offer substantial loans at amazing rates.
What's an ICL?
Let me give you an example. I recently had a client who was looking for a line of credit for his business, which he owns with a partner. With an ICL he was able to successfully leverage one of his personal accounts to facilitate the process—and the rate was substantially lower than other conventional loans he was considering.
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In this case, the ICL was a good option for my client because he had a significant asset base and a willingness to utilize a portion of it for his firm.
In general, ICLs are very flexible. These loans are typically easy to set up and allow ongoing and adjustable access to credit. But there are restrictions. For example, you can only use non-retirement accounts as collateral for an ICL. The financing you can access could be significant: Just to give you an idea, you might be able to borrow as much as 80% of your account value when borrowing against investment-grade bonds and up to 70% on a diversified equity portfolio.
How do I get one?
Generally speaking, you need to have a minimum amount of assets in your account in order to qualify, and for the most part, the more money you have, the better your interest rate will be.
In addition to your assets, your interest rate will be tied to LIBOR. Recently, I've been seeing rates for my clients in the neighborhood of 1.5% to 2.5%. Under certain circumstances, the rates you get could be even more attractive. So, if you've been looking at 4% mortgages or high margin loan rates, and you have the assets to qualify for an ICL, it could be worth considering.
Accessing ICLs requires that your assets are "in-house" with the firm you borrow from. Many companies are confident that you'll avoid the inconvenience of moving your money and charge you fees that are too high, so you might want to shop around.
Helping my clients access ICLs is something I do for free—this eliminates the middle man and, in turn, a layer of fees. I already benefit when my clients consolidate their investments with me as their adviser, so I consider facilitating these loans as part of my holistic service. That means happier clients for me, and typically better rates and less hassle for my clients.
So, if you're looking for a home equity line, mortgage, business or construction loan, or some other form of financing, I suggest you get a quote and do some comparison shopping. Rates don't mean much until you have something to compare them to, so whether you reach out to me or another adviser, I urge you to do your homework. ICLs can be used in so many different ways, and you might be able to get rates that blow your other financing options out of the water.
What are the risks?
As with any loan, there are risks to ICLs.
The biggest risk is that the value of your portfolio could decline to a point where you'll have to come up with additional capital towards your collateral. To manage this risk, it's important to strategize which account (or accounts) you'll be using and to match the loan terms to your risk profile.
It might make sense to speak to your accountant to make sure an ICL is a good idea given your personal tax considerations. Actually, it's always a good idea to have tax planning in mind when making financial decisions, and you should inquire about the differences in tax treatment between ICLs and other loans.
Also, remember that ICLs are tied to LIBOR, which is a variable interest rate.
ICLs can be an amazing tool in the right circumstances, and they can also save you a lot of money as a borrower. If you have the asset base and are looking for a loan, take a look to find out whether an ICL is right for you.
Bradford Pine is a wealth adviser and president of the Garden City, NY-based Bradford Pine Wealth Group. He assists individuals to create wealth, simplify their lives and plan for retirement.
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