Understanding Securities Based Lending
Previously we laid out the back story surrounding the current economic environment and addressed tax issues faced by today’s affluent securities investor and purchaser of luxury properties in desirable towns such as Atherton, Palo Alto, and Los Altos. Now we move forward with a key aspect of the process used in the strategy: Securities Based Lending.
The incredible opportunity for today’s investor exists because of the desirability of their available collateral, stocks and bonds. While securities change price daily, there is a high level of comfort for an investment bank when they can easily monitor the collateral and potentially have immediate liquidity if necessary. Collateral securities allowed will vary, but usually range from individual or concentrated stock positions, mutual funds, municipal bonds and government bonds. Retirement funds such as IRA’s and 401K’s are excluded from being used as loan collateral but are useful in other circumstances. Advance amounts range from about 50% to as high as 80-90% of the value of the appropriate securities held by the investor at the investment bank.
Using securities as collateral is so attractive to investment banks that there are very few underwriting requirements for a borrower to qualify. There is no minimum income level required, although tax returns usually will be requested on very large loan requests in excess of $10,000,000. Even though an initial credit check will occur, it is primarily done to search for tax liens, not to determine a qualifying credit score. No future credit reporting is done and the loan does not appear on a credit report. The lending is typically done at no cost; no application fees, no underwriting fees, no closing costs or annual fees.
Presently the interest rates charged for securities based lending are exceptionally attractive because of the abundance of low cost short term funds. The one month Libor index is typically used for pricing and a margin is added. The margin will vary depending upon the size of the line or loan established. Total interest costs will be in the mid- 2% range when borrowing $10,000,000, to the low-4% range for $500,000 lines currently.
Interest costs will occur when funds are advanced and monthly payments are then required. However, depending upon the existing line equity available, the interest only payments can be capitalized and charged back to the line if desired. The funds advanced can be used for any purpose other than purchasing more securities. The most common use for Securities Based Lending is real estate transactions.
You are now familiar with basics of Securities Based Lending. Knowledgeable financial advisors and informed Real Estate Agents customize this basic concept around their client’s needs as they purchase luxury properties. We will build upon this information and the benefits from various situations will be explored, along with the ways of managing the associated risks.
We hope you’ve enjoyed Part 3 of our series! You are invited to explore future posts discussing these strategies and more in the next weeks! For more information on these programs, contact Dawn Thomas today at 650-947-4661. She’ll be delighted to connect you with our local partner who offers solutions to the affluent buyer.
This blog is courtesy of The Dawn Thomas Team who is an award-winning Real Estate Agent team at Intero Real Estate Services in Los Altos 650-947-4661. We help nice people with selling and buying homes from Palo Alto to West San Jose!
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