From Equity to Entryway: Leveraging Investments for Real Estate

If you’re hoping to finance the purchase or real estate, but don’t want or can’t access a mortgage to do it, this is for you. An investment backed line of credit (also known as a margin loan, Lombard lending, securities backed lending, or a portfolio line of credit) is a strategy where you use existing investments to borrow money.

How does it work?

It works similar to a mortgage, with the main difference in what you use as collateral. With a mortgage, you pledge real estate as security – so your lender could take possession of the property if you don’t repay the loan. With an investment backed loan, you pledge your investments as security instead.

Investment-backed lending mean instead of liquidating your investments and losing out on potential returns and incurring additional tax charges, your investment portfolio remains invested and maintains its long-term strategy and yield.

Financing can be secured against a full portfolio or against single stocks. The amount you qualify for will depend on the type of investment you have – with potentially different loan-to-value ratios for different investment products. Investments that have less fluctuation in value, and higher liquidity, will have higher loan-to-value ratios and allow you to borrow more. 

You can apply for investment backed loans (meaning you repay the amount you borrow over time with fixed payments), but more commonly borrowers opt for investment backed lines of credit. This allows you to use and repay any amount of your approved balance at any time. It gives a lot of flexibility in use.

When would you use investment backed line of credit? 

There are plenty of circumstances where you’d want to consider investment backed financing. Here are a few of the most common scenarios:

1. You want to help your kids buy a property. You’re saving for retirement and don’t want to take funds away from your future self – so keep them invested while you use them to secure a lump sum of cash. 

2. You want flexible financing. You can treat an investment backed line of credit like a bank account, just with a negative balance. It’s instantly available, and the balance can go up or down as you need. You can also make interest only payments on your outstanding balance or deposit the full amount back at any time.

3. As an alternative to bridge or construction financing. If you want to buy a property before you sell your current one, this is a great way to borrow money for a short – but undetermined – amount of time. You can also use it on-demand to pay contractors, so you don’t accrue any interest before the work is done and the bills are due

4. You don’t qualify for a mortgage. Say you’re new to Canada, or maybe you’ve already maxed out your borrowing based on your current income. Using your investments to secure financing is a great way to use what you have without depleting your savings.

5. You have long term investments. You might have committed to a long-term investment strategy, but if circumstances have changed and you need cash in the short term – say for schooling, a home renovation, or new vehicle – this is a way to avoid facing the repercussions of cashing out early.

Pros and cons 

The main reason for an investment backed loan or line of credit is to maintain your investments – for compounding, interest, and tax benefits – yet access the benefit of having them. A line of credit of course allows you to use it, pay it back, and use it again as often as you like. You only pay for what you need and use, which is great. And your investment collateral allows you to access a lower rate for borrowing than you otherwise would. It’s also easier to get approved for financing. And finally, sometimes you don’t even require a credit check!

However, like any collateral pledge, if you don’t meet the conditions of the financing, your asset could be at risk. If your investment goes down in value, you may be required to pay back a portion of the borrowed money to maintain a maximum loan-to-value ratio. Or, the lender may sell off some of your assets to cover the outstanding balance.

Want to learn more?

There are a variety of lenders in Canada that offer investment backed lending, from the big banks to online investment platforms to credit unions to private lenders. Each one will have their own rates (usually based on prime + a percentage), their own borrower qualifications, and their own terms (loan-to-value ratio, repayment, etc.). Working with an investment professional will help you understand your options and pick the right one for you. If you want to explore this option further, let me know and I will guide you in the right direction.