In today’s market climate, fluctuation, volatility and downturn are disquieting terms we hear on a daily basis in the media. These terms, however, carry less weight for those that are prepared, or “insulated” from the market changes. A valuable tool to help further insulate you during turbulent times is a Securities-Backed Line of Credit (sometimes called an Asset-Backed Line of Credit or a Portfolio Line of Credit).
Securities-Backed Lines of Credit work similarly to a home equity line of credit except instead of tapping into the equity in your home, you borrow against the “equity” of your taxable accounts (non-retirement accounts). Essentially, your securities become collateral and are typically borrowed against up to a certain percentage of their total value. The typical percentage is 50-70% of your account value. Another important aspect to note is not only do you get to leverage on the equities you own, but you can also leverage on the fixed income and cash positions in your portfolio. This allows for increased borrowing power by taking advantage of even your more safe and secure positions in the account.
The best use for this type of borrowing is for short-term liquidity. A few situations that might require short-term cash needs are purchasing a new home prior to selling your existing property, funding your child’s wedding, or covering a large repair or replacement of a vehicle. The attraction is the ability to tap into a large amount of cash without having to use your emergency funds or sell equities in a down market which may result in losses and/or negative tax consequences. It allows you the freedom to stay fully invested and on track with your investment plan. Typically, there are no set up fees and you only pay interest on the funds you use which tend to be lower than other financing options.
Please feel free to reach out should you have any questions about Securities-Backed Lines of Credit. We aim to be a valuable resource to our clients and always welcome an opportunity to educate and share information.