Using a Margin Loan to Buy a Home
An overview of using a margin loan to assist in purchasing a house
Many people have considered using a margin loan to purchase a home or even to pay down a mortgage. In this capacity, they can borrow against their investment portfolio and pay down the mortgage, essentially “refinancing” it from a traditional mortgage to a margin loan. In today’s interest rate environment, you may be able to drop a 4%-4.5% loan down to less than a percent which seems attractive from the onset. Above and beyond margin call risks, borrowers take on additional risk which is an interest rate risk. In a 30 year loan, you have the certainty of knowing that your rate is locked-in for the term of the loan. In a margin loan, your rate will fluctuate month to month depending on the underlying index. This is a very important factor to consider because, over time, your variable rate loan structure could rise up much higher than your rate that’s currently locked. If you are only planning to own the home for a short period of time this may make sense as it lessens the period of time that your interest rates could increase, but one should think twice about using this strategy over the long term as it could be costly.
If a margin loan is used to purchase dividend producing stocks and interest bearing bonds, you may be able to deduct the interest against your portfolio income. Some clients will use proceeds from a stock sale to fund the mortgage loan payoff, then re-margin to purchase back those securities which are possibly a way to gain deductibility and keep your portfolio integrity. Once should always consult their tax advisor to determine eligibility before making any changes to their loan structure. Other benefits possibly can include no closing costs on a margin loan where typical mortgages can be costly.
There are additional risks when thinking about refinancing your mortgage to a margin or even using it to pay off a home. Most importantly, unlike a traditional mortgage, if the value of your investment portfolio should fall, the bank can call you to pay down the loan or deposit additional securities. If you are unable to do this, they can sell your securities at a low price to pay down the loan. Do not leverage your portfolio too much or consider moving your investments to a safer position if you are considering this strategy. To protect against margin call risk, you may also consider opening up a home equity line so that you could easily pay down the margin loan if your portfolio fell in value. Above we also discussed the interest rate risks associated with a variable margin loan as well. As always, you should consult your financial and tax advisor before making these decisions.