You’ve saved your pennies and invested wisely. Now you have an appreciating base of liquid assets outside of retirement accounts. Those assets are appropriately invested, but you may not be aware those assets can remain invested… while also being used as collateral for a low-interest loan.
What would you do with an interest-only 0.75% to 1.6% loan*?
Interest Arbitrage: Borrow at a low interest rate to fund a higher expected return. With interest rates this low, several opportunities may present themselves depending on your investment options and risk tolerance.
No Credit Check: No Impact to Personal Credit. Because these loans are secured, they do not depend on or affect your personal credit.
Actual Rates Vary: Interest rates depend on the quantity of liquid assets invested:
<$100k: Base + 1.5% $100k-$1MM: Base + 1.0% >$1MM: 0.75%
Base Rate is set by the lender but is typically comparable to 30-day LIBOR (4/’21 Base Rate of 0.07%)
Example: It’s tax time and you have a bill due for $20k. You can liquidate securities to pay the bill, but would rather keep the money invested. You decide to borrow $20k from your equity account at 1.57% interest and avoid selling stock. The principal can be repaid at your discretion. Interest payments are deducted directly from cash in your investment account (or funded by dividend-paying investments).
Risks & Limitations:
1. Borrowing using equity as collateral is risky and is not appropriate for all investors
2. The amount of collateral will be determined by the lender and will vary based upon the risk and diversification of the portfolio
3. Retirement assets cannot be used as collateral
4. You and/or your advisor are responsible for maintaining sufficient collateral. If the value of your collateral falls below required levels, your collateral will be sold without warning
5. Insufficient collateral is most likely to occur during a market crash. We, therefore, recommend maintaining some downside crash protection to minimize the odds of a forced sale at market lows. Crash protection may reduce overall portfolio returns
6. Interest rates may go up without warning and require you to repay a portion of the loan or supply additional collateral
7. Assets must be invested with the lender at all times. Withdrawals of assets may be limited, depending on the amount of excess collateral maintained in the account
* Rates as of 4/21