Security-backed mortgages require the borrower to pledge liquid securities as security for a loan. Equities, investment funds, bonds and other security types are the most common. Financial instruments or marketable securities provide the collateral required to support borrowing.
Securities backed lending enables borrowers to use a pre-agreed credit line in a pre-agreed period to access capital or increase liquidity without the need to sell the securities. It is a line of credit that is flexible and quick to arrange. The process is generally straightforward, although terms can vary, and expert advice to secure the most favourable terms can be beneficial.
Capital can be borrowed for various uses. It is a popular borrowing mechanism that experts in the field organise for a wide variety of high-net-worth clients.
Why use security-backed mortgages and borrowing?
Instead of selling your assets and securities, security-backed lending offers the opportunity to borrow up to around 50% of the holding value at relatively affordable rates. If you need cash to make a large purchase, it may not come at a time when it is favourable to sell securities, or you may feel there is more to be gained by keeping them. Whatever the reason, securities-backed lending can offer the ideal borrowing solution to avoid liquidating assets to raise capital.
Suppose you are looking to maximise an unexpected opportunity and don’t want to consolidate any losses, gains or tax implications. In that case, borrowing against the security will enable you to go ahead. Underwriting is often limited by collateral value, making arranging the process efficient and speedy.
Many banks will offer securities-backed lending. However, the mainstream markets often limit themselves to the so-called vanilla borrower. The negotiation, timing and presentation of applications usually requires an experienced broker to secure the most advantageous deals. For anyone with a complex financial setup, the best options are usually from private equity houses, alternative financiers and specialist lenders who better understand complex portfolios as high-value borrowing collateral.
Are there any securities-backed lending limitations?
You should always expect a loan-to-value cap, as lenders need to be able to absorb the volatility and value changes of your holdings during the loan period without suffering financially. Some will require a margin call that could see you needing to repay the loan early or provide additional security if the value of the existing security falls below an agreed level.
These limitations are certainly not to be feared. However, understanding the full impact of the borrowing terms is essential and can be tricky without the support of a knowledgeable broker who can negotiate agreements on your behalf.
Areas to Consider
- Whether or not you retain voting rights
- What happens to stock dividends
- Clauses to cover short selling
- Whether physical stock delivery is required
- Whether any additional relationships with the lender are required
- The loan-to-value ratio and loan terms and flexibility within the arrangement if situations change
It’s essential to consider all of the above criteria before making a final decision on whether securities-backed lending offers you personally the best solution for your needs. Knowing about all the options available is a wise approach as there may be better-suited lending solutions. Try explore all market areas before taking the plunge.
