For high-net-worth individuals and sophisticated investors, your stock portfolio is more than just a collection of investments—it’s a powerful financial asset that can unlock unique opportunities.
But what if you could access the value of your portfolio without selling a single share? This is where securities-based lending comes into play.
Imagine you’ve built a diverse, high-performing stock portfolio over many years.
An exceptional investment opportunity arises—perhaps a prime piece of London real estate or a promising business venture. You need quick access to substantial capital, but selling your carefully selected stocks would trigger significant capital gains tax and disrupt your long-term investment strategy.
Securities-based lending, also known as Lombard lending, offers a solution.
In 2023, the UK experienced a 15% growth in securities-based lending, with outstanding loans reaching £7.5 billion. This increase reflects growing recognition among affluent investors of the flexibility and strategic advantages this financing option offers.
Let’s explore how you can use your stock portfolio to access capital while maintaining your investment strategy.
Understanding Securities-Based Lending: How It Works
Securities-based lending allows you to borrow money using your investment portfolio as collateral. Private banks and wealth management firms typically offer this service, catering to clients with substantial investment portfolios.
In the UK, financial institutions like Coutts, Barclays Wealth, and HSBC Private Banking are leading providers of these services. They understand the unique needs of high-net-worth individuals and offer tailored lending solutions in the form of Lombard Loans.
The amount you can borrow depends on your portfolio’s composition and value.
For blue-chip stocks listed on the FTSE 100, you might secure a loan-to-value (LTV) ratio of 60-70%. This means if your portfolio is worth £1 million, you could potentially borrow up to £700,000.
Interest rates for securities-based loans are often competitive, typically based on LIBOR or the Bank of England base rate plus a margin. Many lenders offer flexible repayment options, sometimes allowing interest-only payments with the principal due at the end of the term.
Eligibility and Requirements
From time to time, exceptional opportunities arise that demand swift action.
Yet, even individuals with substantial assets can face challenges when seeking suitable financing options.
Your financial situation might be intricate, perhaps involving sporadic or minimal income streams. Alternatively, the majority of your wealth could be invested in various assets or bound up in the value of a business venture.
These circumstances can make traditional financing routes less accessible or appealing, even for those with significant net worth.
To qualify for securities-based lending, you typically need:
- A minimum portfolio value: Most lenders require portfolios worth at least £100,000-£500,000, though some may set higher thresholds.
- Eligible securities: Your portfolio should consist of readily marketable securities, including stocks listed on major exchanges (UK and international), government and corporate bonds, and certain mutual funds or ETFs.
- A diverse portfolio: Lenders prefer well-diversified portfolios to mitigate risk.
- Good credit standing: While the focus is on your securities, a strong credit history can help secure better terms.
While your credit score is considered, it’s not typically the primary factor in approval decisions. The quality and liquidity of your portfolio often carry more weight.
Benefits of Borrowing Against Your Stock Portfolio
Securities-based lending offers several compelling advantages for high-net-worth investors:
Maintain Market Exposure
By borrowing against your portfolio rather than selling assets, you keep your investment strategy intact. This allows you to potentially benefit from ongoing dividends and capital appreciation.
Tax Planning
In the UK, selling stocks can trigger capital gains tax. By borrowing instead, you can defer or potentially avoid these tax events altogether. For instance, if you needed £1 million and sold shares to raise this amount, you might face a substantial tax bill. Borrowing the same amount against your portfolio does not incur a CGT tax liability.
Quick Access to Capital
Unlike traditional loans that may take weeks to process, securities-based loans can often be arranged within days. This speed can be invaluable when time-sensitive opportunities arise.
Competitive Rates
Given the high-quality collateral, these loans often come with attractive interest rates compared to unsecured borrowing options.
Flexible Use of Funds
One of the most appealing aspects of securities-based lending is its flexibility.
As a high-net-worth investor, you can use the funds for various purposes:
Property Investments
The UK real estate market, particularly in prime areas of London and other major cities, often presents lucrative opportunities. With a securities-based loan, you could quickly finance a property purchase without liquidating any stock holdings.
Business Ventures
Whether you’re looking to expand your own business or invest in a promising start-up, this type of lending can provide the necessary capital without disrupting your investment portfolio.
Luxury Acquisitions
High-value purchases can be financed without selling off your carefully curated stock positions.
Consider a UK tech entrepreneur who used a £2 million securities-based loan to acquire a competitor, doubling her company’s market share within a year. The loan allowed her to seize a time-sensitive opportunity without diluting her ownership in her own company or selling her diversified stock portfolio.
Let’s talk!
Risks and Considerations
While securities-based lending offers numerous benefits, it’s important to understand the potential risks:
Market Volatility
If your portfolio’s value declines significantly, you may face a margin call, requiring you to deposit additional funds or securities. During the 2008 financial crisis, many investors faced this scenario as stock values plummeted, leading to forced asset sales.
Interest Rate Fluctuations
If you opt for a variable rate loan, rising interest rates could increase your borrowing costs.
Regulatory Landscape
While securities-based lending isn’t directly regulated by the Financial Conduct Authority (FCA) in the UK, the FCA does oversee the institutions offering these loans. It’s important to work with reputable lenders who adhere to best practices.
Overleverage Risk
The ease of accessing capital can sometimes lead to overextension. It’s crucial to have a clear repayment strategy.
To evaluate your own risk tolerance, consider factors like your portfolio’s diversity, your cash flow situation, and your long-term financial goals. Always have a plan for how you’ll repay the loan, independent of potential market gains.
Alternatives
While securities-based lending can be an attractive option, it’s worth considering alternatives to ensure you’re making the best choice for your financial situation:
Personal Loans
For smaller amounts, a personal loan might suffice. However, interest rates are typically higher, and loan amounts may be more limited.
Remortgaging Property
If you own property in the UK, remortgaging could provide access to capital. This option might offer competitive rates, especially in the current low-interest environment, but it can be a lengthier process, often taking 4-6 weeks.
Short-term Bridging Loan
Bridging loans are not just used for purchasing property or escaping a broken property chain. You can use a bridging loan to capital raise on properties you already own, either residential or commercial.
Selling Other Assets
Sometimes, selling other assets such as cars or art might be the most straightforward option, especially if you’re looking to rebalance anyway. However, this may trigger a taxable event and could disrupt your investment strategy.
Each option has its pros and cons. For example, while remortgaging your £2 million London home might offer a lower interest rate, it will take weeks to arrange and might not provide as much flexibility as a securities-based loan.
Is Securities-Based Lending Right for You?
There are many reasons why some people borrow against an investment portfolio. Securities-based lending offers HNW individuals and sophisticated investors a way to access liquidity without disrupting their investment strategies.
It provides flexibility, potential tax advantages, and the ability to capitalise on opportunities quickly.
However, it’s not without risks.
Market volatility can lead to margin calls, and the ease of accessing capital requires disciplined financial management.
Our advisers will be happy to discuss your requirements and explain the most suitable funding options from our lending partners.
Need some help?
If you need short-term finance then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
