Personal Finance & Money Asked by saccharine on May 26, 2021
I have a decent amount of money saved up, most of it invested in the stock market. Right now I’m thinking about getting a condo / house. I have more than enough in my stock portfolio to simply buy a property in the price range I’m looking at outright, without requiring a mortgage. However, interest rates are so low right now that it makes sense to me to get a mortgage anyways. In addition, there’s tax benefits etc.
I’m aware of the general concept of securities backed loans, but the general rates I see from large companies are horrendous (~7-9%). On the other hand, I know I can get ~2% margin loans from Interactive Brokers, though I’ve never actually used them myself and I’m unsure if I’ll run into any complications there. I haven’t been able to find a specialized financial instrument to accomplish what I’m looking for.
I feel like there should be a way where I can obtain a mortgage using both the property and part of my stock portfolio as combined collateral, and get a substantially reduced mortgage rate in return.
Is there a way that I can use my stock portfolio to get a lower rate on my mortgage? Ideally, it should be under the margin rate from Interactive Brokers.
For perspective the rates you are seeing are not horrendous. It was not that long ago when people were happy to get a 8% mortgage because their parents percentage rates were in the teens.
I think you have two options with a third if you already owned a home.
The first, is the one you already know about the margin loan. This is very popular among some people with money. It would be best to use very stable stocks to secure the loan with a lot of wiggle room. You don't want a margin call.
The second is using an institution with a brokerage. For example if you use JP Morgan and Chase you can get perks for being a "private client". One of those perks is a break on your mortgage rate.
The third is to use a home equity loan to finance a home. If you put the loan in first position, get a fixed rate for a fixed term, the rates are very low. Typically about a point lower than the prevailing 15 year rate. Also the closing cost may be low or non-existent. The drawback is you have to own a property first. In your case you could buy the property from investments, then initiate the HEL, and then replenish your investments.
Editorially, even with these low rates there is no good reason to have a mortgage. If you can buy a property for cash, then you should just do so. Increasing your free cash flow is far more valuable IMHO.
Correct answer by Pete B. on May 26, 2021
I don't think adding stock as collateral will help you get a significantly better rate. The mortgage you'll get is already fully collateralized, since you won't be able to borrow more than the house is worth (and hopefully can put down enough down payment that the loan is over-collateralized to avoid PMI). If you default, the bank is most likely going to get their money back by foreclosing on the house - they won't need your extra collateral.
Since collateral is not an issue, then the basis for your rate is your credit worthiness. Do you have sufficient stable income to make the payments safely? Do you have any history of missed payments or overuse of credit? Those are the issues that will have a bigger effect on your mortgage rate.
If you want to reduce your mortgage rate, you could sell enough of your stock to get the loan-to-value well below 80%, significantly reducing the loss to the bank if you should default.
I'm aware of the general concept of securities backed loans, but the general rates I see from large companies are horrendous.
That's probably because these are desperation loans by people that have bad credit, and the fact that the collateral could go down in value very easily. Those facts increase the risk of loss, thereby requiring a higher interest rate to compensate for the risk.
Answered by D Stanley on May 26, 2021
As the other answers have basically said, "No, because your borrowing rate is determined by your collateral". For a home loan you are paying one of the lowest rates because of the nature of that collateral being fairly secure from a historical perspective.
In addition, with a home loan you can get a fixed rate pretty close to 2%. With a margin loan you are effectively paying a variable rate which is determined most likely by some formula based on the prime rate plus some margin, or perhaps some proprietary formula that is not published. I doubt that IB will mind you borrowing for 15 or 30 years as long as your collateral (portfolio) maintains its value, but your interest rate most assuredly will not be fixed at 2% for that whole time.
Answered by Michael on May 26, 2021
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