Margin Loan Guide

Margin loans have many benefits, including lower rates and more flexibility than other types of borrowing. But they may not right for everyone.

Margin Loan Guide

What is a margin loan and how does it work?
Initial Equity Requirements
Maintenance Requirements
Use of Margin Loans
Margin Loans Vs Other Lending Options
Tax Implications
Margin Loan Risk Management
Strategies to Reduce Margin Risks

What is a margin loan and how does it work?

Margin loans are personal loans that borrow against the securities in your portfolio, such as stocks, bonds and mutual funds, to get cash. Borrowing on margin is a tool that can potentially generate greater returns, execute investment strategies, and serve as a flexible source of low cost borrowing for personal financial needs.

Typically, margin loans are tied to a variable rate structure and offer more flexibility and more favorable rates than other borrowing sources. A margin loan can be a valuable financial tool in the right situation, but you should be aware that it can amplify both profits and losses.

The amount you can borrow on margin depends on the type and value of securities in your Biltmore portfolio. To purchase securities, that amount is usually limited to 50 percent of the value of your marginable securities, but can go as high as 90% on specific bonds. You must maintain equity in your portfolio, depending on the type of securities you hold.

If the equity in your portfolio falls below the minimum maintenance requirement, you’ll have to deposit additional cash or collateral. If you cannot meet your minimum, you could be subject to a margin call and we may have to sell securities form your portfolio, with or without your prior approval. Before borrowing on margin, be sure to discuss with your Biltmore Financial Advisor the risks associated with margin loans and have risk mitigation strategies in place.

While margin loans aren’t for everyone and present unique risks, they can provide flexible, effective ways to work toward your financial goals.

Initial Equity Requirements

The amount of money you can borrow on margin toward the purchase of securities is typically limited to 50 percent of the value of marginable securities in your account (subject to eligible securities), but can increase for certain bonds. However, it is prudent to borrow less to minimize risk. [Federal Reserve Board Regulation T allows brokerage firms to lend clients up to 50% of the total purchase price of a stock.]

Our custodians further requires that the equity in an account be at least 30% of the current market value of the security (subject to certain restrictions). To begin borrowing, you must have at least $100,000 in cash or marginable securities in your account with us and fully aware of the risks that the margin strategy would impose.

 

Maintenance Requirements

Once you borrow on margin, you are required to maintain a certain amount of equity in your account, depending on the securities you hold. Typically, that collateral requirement is at least 30% of the total account value, but it can be higher for certain securities or accounts.

Biltmore will calculate your buying power and cash available for withdrawal, and provide you with that information in your account summary.

Because maintenance requirements are based on current market value of a stock, not your purchase price, a price decline in a marginable security will reduce your equity and potentially trigger a margin call in your account. If that happens, you must promptly deposit the necessary cash or securities, or liquidate sufficient securities in the account, to satisfy the margin call. For complete information on margin lending requirements, contact your Biltmore Financial Advisor.

 

Use of Margin Loans

Margin loans can be used to purchase securities, or for a wide range of personal financial needs, including short-term borrowing and cash-flow needs:

  • Take advantage of market opportunities
  • Defer capital gains taxes from selling securities
  • Consolidate or refinance debt
  • Pay off a higher rate mortgage or buy more property
  • Help pay college costs
  • Start a business
  • Take a dream vacation
  • Explore a passion

Margin Loans Vs Other Lending Options

Margin loans can offer more flexibility, ease of transaction and possibly lower rates than other types of borrowing. You can replay a loan at your own pace, as long as you maintain the required equity in your portfolio. You might be able to deduct the interest against your net investment income.

Key advantages include:

  • Increased buying power. Margin trading allows you to leverage the assets in your account to purchase more securities than you would be able to buy on a cash-only basis.
  • Trading flexibility. Take advantage of timely market opportunities or make investment changes when you want, as long as you maintain the minimum equity required.
  • Competitive interest rates. Margin loans can be more cost-effective than credit cards or other lending options.
  • Portfolio diversification. If you hold a concentrated stock position, you can use margin to diversify your portfolio.
  • Tax deductibility. The interest on margin loans may be tax deductible against your net investment income.
  • Ready line of credit. You can borrow on margin to meet personal financial needs whenever you want, without extra paperwork, credit checks or approvals.
  • Flexible repayment schedule. There are no minimum monthly payments on a margin loan as long as you maintain the required equity level in your account.

Margin loans are not right for everyone. Margin borrowing increases your level of market risk. If you purchase securities with a margin loan and the underlying value of those securities goes down, you must still repay your loan.

 

Tax Implications

The interest on margin loans may be tax deductible against your net investment income. Investment interest expense is the interest on money you borrow to purchase taxable investments.

The rules for deducting margin interest costs from personal income taxes can be complicated. For example, you may be able to deduct the interest on a margin loan you use to purchase stock against the income you receive from that stock, but not if you use the margin loan to buy a car or tax-exempt municipal bonds. Consult your tax advisor to understand the specifics regarding margin deductibility and how it may affect your specific situation.

Margin Loan Risk Management

Margin loans have many benefits, including lower rates and more flexibility than other types of borrowing. But they may not right for everyone.

At Biltmore, we want our clients to fully understand both the benefits and risks of a margin loan strategy to determine if it makes sense for your individual situation.

Margin borrowing increases your level of market risk. If you purchase securities with a margin loan and the underlying value of those securities goes down, you must still repay your loan.

If the equity in your portfolio falls below the minimum maintenance requirement, you’ll have to deposit additional cash or collateral. If you cannot meet your minimum, you could be subject to a margin call and we may have to sell securities form your portfolio, with or without your prior approval.

 

Strategies to Reduce Margin Risks

Before borrowing on margin, you and your Biltmore Financial Advisor will discuss these risks and others associated with margin loans, such as the variable interest rate structure and hedging with interest rate locks through Swaps.

Together, we can develop strategies to reduce these risks and take advantage of the low interest rates that Biltmore offers. We can also work directly with your tax advisor to see if you qualify to deduct the interest on a margin loan.