We consistently offer the lowest margin loan rates available by leveraging our broker-dealer relationships. Effective low rate margin loan strategies from Biltmore can help put your investment assets to work with more borrowing flexibility.
|**Rates are based on the fed funds index and will change when the federal reserve increases or decreases interest rates. Rates are as of September 2018.|
- What is a Margin Loan?
- How Margin Loans Work
- Requirements for Margin Lending
- Benefits and Risks
- Our Process
What is a Margin Loan?
Margin loans are personal loans that borrow against the securities in your portfolio to get cash. Typically, margin loans are tied to a variable rate structure and offer more flexibility and more favorable rates than other borrowing sources.
The money can be used to purchase securities or for a range of personal financial needs, from debt consolidation or refinancing to paying off a mortgage, to paying for college costs or a dream vacation.
How Margin Loans Work
The amount you can borrow on margin depends on the type and value of securities in your Biltmore portfolio.* To purchase securities, the amount is usually limited to 50 percent of the value of your marginable securities. You must maintain equity in your portfolio of at least 30% of the total account value, depending on the eligible securities you hold.
* If you are more interested in learning about margin loan borrowing against self-managed portfolios, visit our affiliate, Stone Creek Capital Management, here.
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 from 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.
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
Requirements for Margin Lending
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 custodian 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 be fully aware of the risks that the margin strategy would impose.
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.
Benefits and Risks of Margin Loans
Margin loans offer more flexibility, ease of transaction and lower rates than other types of borrowing. You can repay 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.
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.
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 from 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.
To illustrate how maintenance requirements work, here’s an example: You deposit $1,000,000 worth of securities into an account. Depending on the underlying collateral, you can borrow 50%-80% of the value of your positions. Assuming qualified stock collateral, you can borrow 50%.
Based on this example, you can immediately borrow $500,000. If the value of your securities drops, putting you at 35% equity, or $769,000, you would be unscathed because you have sufficient equity in your account.
However, if the value continued to drop, reaching a 30% equity position, or $715,000, you would enter into a margin call. If you do not meet the margin call, the firm has the right to sell your securities to increase your equity until you meet the maintenance margin. Also, your firm would not need to contact you prior to selling securities. You would have no control over which securities are sold to cover the margin call, unless you worked with your advisor on a strategy.
At Biltmore, we want our clients to fully understand both the benefits and drawbacks of a margin loan, and together we will determine if it makes sense to employ this strategy.
Upon request, we will act as your consultant to understand what you are trying to accomplish and if a margin loan makes sense. Your advisor can discuss possible drawbacks, such as the variable interest rate structure, the ability to hedge this risk, margin call risk, and well as others. Together, we will develop strategies to reduce these risks and take advantage of the low rates offered.
We can work directly with your CPA to see if you can properly deduct the interest and brainstorm about the best way to accomplish the tax deductibility. Call an advisor today to learn more about setting up a low rate margin loan through Biltmore Capital Advisors.
*Margin loans are offered through unaffiliated third party broker-dealers.