Astute investors recognise that their investment portfolio isn’t just a collection of bonds, stocks and shares —it’s a powerful resource for accessing capital.
Borrowing against your investment portfolio, often through Lombard loans, offers a unique way to unlock liquidity without disrupting your investment strategy.
This approach is particularly relevant for high net worth individuals and sophisticated investors in the UK seeking flexible financing options.
As we explore this financing method, we’ll uncover its growing popularity, examine its benefits and risks, and help you determine if it’s the right move for your financial goals.
Understanding Portfolio-Backed Borrowing
What is a Lombard Loan?
Lombard loans, named after the innovative banking practices of Italy’s Lombardy region, allow wealthy investors to borrow against their liquid assets such as stocks, bonds, and investment funds.
These loans provide quick access to capital without selling valuable investments.
In the UK, Lombard loans typically offer short to medium-term financing, ranging from a week to 24 months. They feature flexibility, often with no early repayment penalties and the ability to borrow in major currencies like GBP, USD, or EUR.
explore lombard loansHow Portfolio-Backed Loans Work
When you take out a portfolio-backed loan, the lender uses your investments as collateral.
UK investors can typically borrow between 50% to 60% of a portfolio’s value. This loan-to-value (LTV) ratio varies based on the types of assets in your portfolio and their perceived stability.
Interest rates for these loans often use LIBOR or the Bank of England base rate as a starting point, with an additional margin based on the loan’s risk profile. It’s worth noting that as of 2023, LIBOR is being phased out in favour of SONIA (Sterling Overnight Index Average) for GBP transactions.
The collateral requirements can be quite specific. While most lenders accept stocks listed on major exchanges, government bonds, and mainstream investment funds, they often exclude more volatile assets like AIM-listed stocks. This selectivity helps manage risk for both the lender and borrower.
Top Reasons to Borrow Against Your Investment Portfolio
1. Maintain Your Investment Strategy
One of the primary motivations for using a portfolio-backed loan is the ability to access funds without selling off your investments. This approach allows you to maintain your carefully balanced portfolio and stay positioned for potential market gains.
Consider a scenario where you’ve invested heavily in a selection of FTSE 100 companies that you believe are poised for significant growth. Selling these positions to free up cash could mean missing out on substantial returns.
A Lombard loan allows you to tap into the value of these investments without relinquishing your market position.
2. Access Liquidity for Opportunities
In the fast-paced world of high finance, opportunities often come with tight deadlines.
Portfolio-backed borrowing provides quick access to substantial sums, allowing you to capitalise on time-sensitive investments or fund business ventures rapidly.
For instance, imagine you’ve identified a prime piece of real estate in London’s Mayfair district that’s available at a compelling price, but only for a limited time. A Lombard loan could provide the necessary funds to secure the property quickly, potentially leading to significant appreciation in your overall asset portfolio.
3. Manage Tax Liabilities
For UK investors, borrowing against your portfolio can offer tax advantages compared to selling assets outright. When you sell investments, you may trigger capital gains tax. However, taking a loan against these assets doesn’t create a taxable event.
This strategy can be particularly useful when managing large, one-off expenses. For example, if you need to pay a substantial tax bill, using a Lombard loan could help you meet this obligation without incurring additional tax liabilities from asset sales.
4. Bridge Temporary Cash Flow Gaps
High net worth individuals often have complex income structures, with large payments coming at irregular intervals. Portfolio-backed loans can help manage timing mismatches between income and expenditure, ensuring you maintain your lifestyle and meet financial obligations without disrupting long-term financial plans.
For example, if you’re expecting a significant payment soon but face a large expense before it arrives, a Lombard loan can bridge this gap smoothly. This approach maintains your financial stability without forcing you to liquidate investments prematurely.
5. Diversify Your Investment Portfolio
Using borrowed funds to invest in new asset classes can enhance your portfolio’s diversification.
This strategy allows you to spread risk across different sectors or geographies without selling your existing positions.
You might use a Lombard loan to invest in emerging sectors like renewable energy or technology start-ups, balancing your portfolio’s exposure to traditional FTSE-listed companies. This diversification can potentially improve your risk-adjusted returns over the long term.
Advantages of Portfolio-Backed Borrowing
Portfolio-backed borrowing offers several distinct advantages that make it an attractive option for high net worth individuals.
Speed and Convenience
One of the standout benefits of Lombard loans is the speed of the approval process.
Many lenders can approve these loans within 24 to 48 hours, a stark contrast to the weeks or months often required for traditional financing options.
This rapid turnaround is possible because the loan is secured against easily valued, liquid assets. The documentation required is typically minimal, often just proof of identity and ownership of the investment portfolio. This streamlined process can be a significant advantage when you need to act quickly on investment opportunities or manage unexpected financial needs.
Competitive Interest Rates
Lombard loans often come with more attractive interest rates compared to unsecured borrowing options. The use of your investment portfolio as collateral reduces the lender’s risk, allowing them to offer more favourable terms.
Flexibility in Use of Funds
Unlike many traditional loans that come with stipulations on how the money can be used, Lombard loans offer complete flexibility.
Whether you’re looking to invest in a new business venture, purchase high-value assets, or simply need to cover a large expense, the choice is yours.
This flexibility is particularly valuable for HNWI who often have diverse financial needs and opportunities. For instance, you could use a Lombard loan to help finance the purchase of a yacht, invest in a promising start-up, or even fund a child’s education, all without justifying the use to the lender.
Potential for Increased Returns
When used strategically, borrowing against your portfolio can amplify your investment returns through leverage. By using borrowed funds to make additional investments, you have the potential to earn returns that exceed the cost of borrowing.
For example, if you borrow at 3% to invest in opportunities yielding 7%, you could potentially enhance your overall returns. However, it’s essential to remember that this strategy also amplifies risk, and should only be undertaken with a thorough understanding of the potential downsides.
Comparing Portfolio-Backed Loans to Other Financing Options
To fully appreciate the role of portfolio-backed borrowing it’s helpful to compare it to other common financing options available in the UK.
Portfolio Loans vs. Mortgage Refinancing
Both portfolio loans and mortgage refinancing can provide access to substantial sums, but they serve different purposes and come with distinct considerations.
Mortgage refinancing offers lower interest rates than Lombard loans.. However, the application process is more lengthy and complex, often taking 4-6 weeks to complete. You’ll need to provide extensive documentation about your income, assets, and the property itself.
In contrast, a portfolio loan can be arranged much more quickly, often within a few days. While the interest rate might be higher, the speed and flexibility can make it a preferable option for time-sensitive opportunities or when you don’t want to tie up your property.
Consider a scenario where you need to raise £500,000 quickly for a business investment. A mortgage refinance might offer a lower interest rate but will take 4 weeks to arrange. An investment portfolio loan could provide the funds within days, allowing you to capitalise on the opportunity quickly.
Portfolio Loans vs. Personal Loans
Personal loans are an option for accessing funds, but they differ significantly from portfolio loans in terms of borrowing limits, interest rates, and approval processes.
Personal loans typically max out around £25,000 to £100,000, even for high net worth individuals. Interest rates can be high, often ranging from 3% to 12% or more, depending on your credit score and the loan amount.
Portfolio loans, on the other hand, can provide access to much larger sums—potentially millions of pounds—often at lower interest rates. They also don’t impact your credit score in the same way as a personal loan application.
For instance, if you needed to borrow £250,000, a personal loan won’t be feasible due to borrowing limits. Even if you could secure that amount, the interest rate would likely be significantly higher than a portfolio loan.
In this case, a Lombard loan could offer a more cost-effective and bespoke solution.
Portfolio Loans vs. Selling Assets
The decision to borrow against your portfolio versus selling assets outright has significant implications, particularly in terms of tax consequences and long-term investment strategy.
In the UK, selling investments can trigger capital gains tax (CGT) if your gains exceed the annual allowance. For high net worth individuals, this can result in a substantial tax bill.
Borrowing against your portfolio, however, doesn’t create a taxable event. This can be particularly advantageous if you believe your investments have strong growth potential and you want to maintain your market position.
Is Portfolio-Backed Borrowing Right for You?
Portfolio-backed borrowing can be an excellent financial strategy, but it’s not suitable for everyone.
UK Lombard loans are typically geared towards high net worth individuals and sophisticated investors.
Most lenders require a minimum portfolio size of £100,000 to £500,000, with some premium services setting the bar even higher. Beyond just the size of your portfolio, lenders will also consider your overall net worth, investment experience, and risk tolerance.
Ideal candidates for Lombard loans often have:
- A diversified investment portfolio with a significant proportion in liquid assets
- A strong understanding of financial markets and investment strategies
- A clear purpose for the borrowed funds, often tied to investment opportunities or strategic financial planning
- The ability to manage the potential risks, including market volatility and interest rate changes
Need some help?
If you need a short-term investment portfolio loan 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.
