Portfolio loans can be one way to make debt work in your favor

Portfolio loans can be one way to make debt work in your favor
Written by Publishing Team

Enshi | E + | Getty Images

Religion often seems like a bad thing. However, there may be methods you can use to your advantage.

If you need money for, say, a one-time account and you have a brokerage account, you may be able to access a portfolio loan or line of credit – which uses a portion of your investments as collateral. Although this method of borrowing money has risks, it can also lead to tax savings and other financial benefits, depending on the specifics of your situation.

These securities-based lines of credit are called different things by the banks that offer them, yet they all work in general: once approved, you can get cash quickly and use it for a variety of reasons (except for buying more securities, which makes this different from a so-called account margin or margin loan).

Here’s what you need to know.


The amount you can borrow depends on the financial institution providing the line of credit, although it can be up to 70% of the value of the assets you pledged as collateral.

“I tell my clients, ‘Yes, you can borrow at 70%, but I’m not going anywhere close to that,'” said certified financial planner Blair duQuesnay, a New Orleans-based investment advisor at Ritholtz Wealth Management.

The amount a bank will lend can also depend on how risky your investments are, she said. The more secure it is, the more you can borrow. For example, if you use bonds as collateral, you may be able to get more than if you pledge risky stocks.

The most immediate risk is that the value of your investment will fall, at which point you could be required to replenish the account holding the collateral. There can also be cases where the lender can sell your assets out of the account (for example, you don’t start paying off the loan within a certain period of time or don’t pay off more assets when you need to do so).

More personal finance:
Consider these tax moves before paying for college
How to identify and control a spending problem
The next big steps to take after leaving your job

“There is a risk any time you consider borrowing more than you can cover,” Dukesnay said.

Some banks offer these lines of credit even if you own assets in another financial institution. The interest rate tends to be more favorable than other means of borrowing. The higher the loan, the better the rate, Duquesnay said.

“This is where the wealthy really benefit,” she said.

For example, it might be possible to secure a $3 million loan at a rate of less than 2% right now, she said. In contrast, credit cards come in at an average rate of about 19%, according to LendingTree. For personal loans, interest rates generally range from around 9% to over 22%, depending on your credit score.

There is a risk any time you consider borrowing more than you can cover.

Blair Duquesne

Investment Advisor at Ritholtz Wealth Management

Be aware, despite the low rates for Portfolio Lines of Credit, they are variable rather than fixed – which means the rate you pay can go up or down.

Prices are very low at the moment, but they should not be expected to remain that low,” said CFP David Mendels, planning director at Creative Financial Concepts in New York. “This is not a problem for short-term borrowing, but beware of relying on it for anything long-term.”

the benefits

If you would otherwise have to offload investments to generate the liquidity you need, the portfolio line of credit avoids selling assets that could have continued to rise in value. As long as the interest rate you pay on borrowed money is lower than what your wallet earns, the math works in your favour.

“If you borrow at 2% and expect your assets to earn 6%, you double your net worth by keeping your money invested and borrowing against it,” duQuesnay said.

Additionally, if you were to sell your investment, you would face capital gains taxes if the assets were worth more than they were when you bought them. Short-term gains (for investments held for a year or less) are taxed as ordinary income and long-term gains (anything held after a year) are taxed at either 0%, 15%, or 20%, depending on the total your income.

In contrast, your wallet loan is not taxable (or reported on your tax return).

So not only do you avoid paying capital gains taxes, but you also avoid the possibility of pushing your income into a higher tax bracket. This, in turn, can avoid other effects of higher incomes.

For example, a 3.8% net investment tax applies to individual taxpayers with an adjusted adjusted gross income of at least $200,000. For married couples who file a joint tax return, the tax applies to income of $250,000 or more.

Or, if you use Medicare, the higher income can translate into paying more for your premiums, both for Part B (outpatient coverage) and Part D (prescription drug coverage). Additional fees start at more than $88,000 for individuals and $176,000 for couples who file a joint return.

Additionally, allowing your investment to grow also comes with tax benefits for your heirs.

Typically, you pay capital gains taxes on the difference between your “cost basis” (its value when you buy the asset) and what you’re selling it for.

However, inherited assets are assigned an “increased baseline” – the value upon the death of the owner. In other words, gains made during the life of the deceased are generally not taxed on those investments. When the heir sells the asset, any gains (and subsequent taxes) will depend on that up-to-date value.

“This is something very wealthy families who have large individual positions in stocks do,” Duquesnay said. “They use dividends to pay interest on [portfolio loan]And then when the first generation dies, there’s basically a step.”


About the author

Publishing Team

Leave a Comment