Margin Loans Case Study

Biltmore helped a client set up a margin loan for bridge financing to buy a home in Florida and pay for it by selling his old house in New Jersey.

The client planned to buy the new home for $1,250,000, move in, then sell his old house in New Jersey to pay off the Florida property loan. Recently retired and living on a fixed budget, he also hoped to reduce his borrowing cost. The client had a liquid portfolio of $4,250,000 to serve as collateral for a margin loan.

A Biltmore margin loan specialist sat down with the client to understand his borrowing needs and goals, and discuss how a margin loan could realize them. We went over the risks associated with margin lending, such as a variable loan structure and the risk of a margin call.

At the time, the New Jersey real estate market was relatively hot and the client planned on pricing the home aggressively. So he wasn’t too worried about the variable interest rate structure. He agreed with Biltmore that his cost of borrowing would stay relatively low for quite some time. We then calculated that the value of his portfolio would have to fall some 58% to trigger a margin call.

The Biltmore advisor discussed other ways he could reduce the risk of a margin call, such as taking out a home equity loan on the Florida property to be used in the extremely unlikely event that the portfolio fell by so much. Given the relatively conservative nature of his Biltmore portfolio, the client determined he could set up a home equity loan without worry. There was little risk that his portfolio would fall so much by so much over the relatively short time frame he needed bridge financing. Setting up the margin loan was simple.

The client transferred his $4,250,000 portfolio to Biltmore’s custodian, which took about a week. All his original investment positions remained intact. When we received the collateral, Biltmore set up the client’s margin loan, wiring him $1,250,000 to purchase the Florida property. At a low interest rate of 0.73%, his interest-only monthly payment came to just $760.41. Eight months later the client sold his home in New Jersey and paid off the margin loan in Florida. The bridge financing strategy recommended by Biltmore had worked exactly as intended.