# Do people actually use broker margin loans for RE?



## james4beach (Nov 15, 2012)

I was on the phone with a rep from one of the big bank brokers, and he made a comment that shocked me. He said that with margin interest rates so low (cost of borrowing against a stock/bond portfolio) some people use these loans for real estate, since they're often cheaper than a mortgage.

So I'm curious to know if people actually do this. Do any of you do this? Do you know anyone who does?

For instance say you have a $500k stock portfolio at Interactive Brokers. I believe you would be able to withdraw half of this on margin loan, so $250k at around 2.2% interest. Certainly I can see the appeal, though it's a loan collateralized by volatile stocks and could be called in if the broker decides to change their margin requirements.

The margin rates at IB are ridiculously cheap (2.0% to 2.5%). Higher at TD Waterhouse and iTrade, 4.25%


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## james4beach (Nov 15, 2012)

Interesting, ok given how fast I got your reply I'll have to assume it's much more common than I thought.

The interest rate at IB is amazing and you're right, a real mortgage comes with other hassles. Just be careful to not borrow right up to your limit and leave a healthy cushion in case stocks fall. IB has a unique policy: if you get a margin call, they will _instantly_ liquidate your assets. They're not as gentle as banks, so you absolutely do not want to get a margin call with IB.


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## james4beach (Nov 15, 2012)

dotnet_nerd said:


> We're planning on doing precisely that. I'm taking $40,000 out of my Interactive Brokers account to do an addition on our house.


Curious though, would you consider just selling some of your stock/bond holdings to raise the $40k, instead of borrowing against the portfolio?


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## Berubeland (Sep 6, 2009)

Frighteningly the League Offering Memorandum for the ill fated Duncan Limited Partnership encourages investors to use the equity in their homes and lines of credit. The following is copied directly from their Duncan Mall Brochure.

Popular Investment Tactics

Here are just a few of the strategies our Member-Partners have used:

Put your dormant home equity to work

If you currently have more than 20% equity in your home, you may qualify for a combination line-of-credit/mortgage which will allow you to invest in the LP Units, in which case the interest paid on funds used invest will be tax deductible.

In some cases it may be appropriate for you to set up a mortgage combined with a secured Line of Credit. Each time you make a mortgage payment, the portion that goes toward paying down the principal is added to the available balance on the Line of Credit. Whenever your available balance reaches an appropriate threshold—say, $1,000 increments—you can use that money to subscribe for additional investment Units. If the rate of return on the investment is greater than the monthly payments on the line of credit this strategy can produce excellent results. As well, in the process, you’ll also make your mortgage interest tax-deductible. 

To find out more, speak to one of League’s Member Services Managers who can introduce you to a mortgage broker who will help you determine if this option makes sense for you.

Use a personal line of Credit Many Members use their personal line of credit to invest in the LP Units, or both. As with using your home equity, the interest paid on funds used invest will be tax deductible

Scary as all get out...


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## james4beach (Nov 15, 2012)

dotnet_nerd said:


> Yes, you're right about their instant liquidation policy, I have to keep an eye on the SMA (Special Memorandum Account) number that it stays positive; it's very healthy even with my withdrawal. I have positions I could sell if I need to.


OK, be careful with that! Another thing you may want to do is, in Trader Workstation's portfolio view, set the "liquidate last" option on certain positions you would prefer to keep. In case of liquidation due to margin call, this requests that IB try to liquidate certain position(s) last. They may not honour it though and it's just a request.


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## andrewf (Mar 1, 2010)

I use some margin for leverage at IB. I'm only comfortable leveraging up to 1.5. I want to be able to absorb 33% drawdowns in the worst case before a margin call. And if I ever get close to that, I'll either add some cash (the position is small enough that I can come up with enough cash to address margin concerns).


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## james4beach (Nov 15, 2012)

Just to clarify, I'm asking about borrowing money from a stock brokerage, withdrawing it, and using it towards real estate... just curious how many people are doing that.


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## andrewf (Mar 1, 2010)

I'm not, but it's an interesting idea. I wouldn't like the idea of using a volatile asset to finance an illiquid one.


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## james4beach (Nov 15, 2012)

andrewf said:


> I'm not, but it's an interesting idea. I wouldn't like the idea of using a volatile asset to finance an illiquid one.


When you put it that way, it does sound very dangerous. I personally think it's a dangerous idea too, but it could be sensible as long as you're borrowing somewhat lower than your limit and accounting for stock declines.

I think a margin account could be used as a line of credit, but I don't think I would ever finance a real estate purchase with it.

Also depends on the composition of your portfolio. Say it's 100k in stock and bond ETFs, 50/50 balanced. I could see it being reasonable to withdraw 30k from this. You could still get a margin call though if the broker changes their margin policies, which can happen at any time.


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## Jungle (Feb 17, 2010)

How much can you borrow with 100k equity? lets say there is 40% crash, what would be a safe amount to borrow?


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## doctrine (Sep 30, 2011)

I would suggest 30%. A 40% crash would reduce you to $60k, and if you had $30k of margin, you'd have a 1:1 margin ratio which is close but still okay. You would rapidly be in trouble after this; another $20k loss and you'd be called at a 1:3 margin; $10k after this and you'd be sold out and left with zero.


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## james4beach (Nov 15, 2012)

Jungle said:


> How much can you borrow with 100k equity? lets say there is 40% crash, what would be a safe amount to borrow?


I calculate $15k (see below).

The more I look into this, the worse of an idea it appears to be.

Problem is that brokers reduce the loan value as securities become more volatile. For instance here is TD Waterhouse's list of securities with higher margin requirements.. There are many ETFs on this list too and I'm thinking that in your 40% crash scenario, many stocks & ETFs would see their loan values downgraded from the usual 50% down to possibly 25%. And if the share price drops under a threshold ($3 at TDW or $2 at IB) the loan values goes right down to 0%.

So I'd try a calculation assuming 25% loan value due to volatile securities: 100k equity crashes to 60k. Maximum loan value is 25% x 60k = $15k


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## james4beach (Nov 15, 2012)

That also illustrates just how ugly a margin call can be.

Say you started by borrowing the maximum possible $50k from that $100k portfolio.
Then the market crashes, loan values drop, and now your maximum possible loan is $15k.

That means you have to rapidly pay back $35,000 in loans while you watch your portfolio lose $40,000 of value!


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## Islenska (May 4, 2011)

I use my margin room like a line of credit from my Holdco.
When cash is needed will transfer the money out to the Family Trust and then dividended out to shareholders.
Currently with Action Direct paying 3% rate on the margin balance.

Have about 27% of total assets on margin, this won't look too great once rates rise.


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## Cal (Jun 17, 2009)

andrewf said:


> i wouldn't like the idea of using a volatile asset to finance an illiquid one.


lol.


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## andrewf (Mar 1, 2010)

james, I think you might be getting too conservative here. You're not going to get a -40% performance overnight. There is time to make corrections by either liquidating part of the portfolio or adding additional cash to the account.


If the assets held in margin are large, liquid funds like XIU or SPY/VTI, I can't see margin requirements being raised as you describe.


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## james4beach (Nov 15, 2012)

andrewf said:


> james, I think you might be getting too conservative here. You're not going to get a -40% performance overnight. There is time to make corrections by either liquidating part of the portfolio or adding additional cash to the account.
> 
> If the assets held in margin are large, liquid funds like XIU or SPY/VTI, I can't see margin requirements being raised as you describe.


I see what you're saying... and I agree that the large liquid ETFs are unlikely to have loan values slashed. So then I would say the same as doctrine: could safely borrow up to 30k on 100k portfolio


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## james4beach (Nov 15, 2012)

Also with certain other asset mixes, you could safely borrow much more from the brokerage. Let's say you had a typical pension fund-style 60/40 mix, with the fixed income portion in GICs or individually held bonds.

With that -40% crash scenario, you can still safely borrow 52k from this 100k portfolio, due to (a) fixed income diversification and (b) the much higher loan values on bonds & GICs.

The amazing loan values on such securities are one reason I prefer directly holding fixed income things and not using a bond ETF. For instance the margin requirement on a GIC is only 15% (broker will lend 85%) versus a stock's 50%. Government of Canada bonds - which I advocate holding directly - have ridiculously low margin requirement at 5% (broker will lend 95%).

Say you had 100k fixed income in bond mutual funds/ETFs, non-registered. The bond funds are a big waste from a margin perspective. If instead you filled up a margin account with a mix of GICs, provincial and government bonds... you could easily borrow 85k or more from this account. That would be an incredible "line of credit" to have access to, and any investor with non-registered fixed income could be doing this! By the way you would also achieve a higher yield, as GIC rates are better than bond funds. Interest paid on the margin loan is also tax deductible because you're borrowing to earn income.


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## andrewf (Mar 1, 2010)

Agreed. I wouldn't bother with bond funds while using margin.


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## james4beach (Nov 15, 2012)

andrewf said:


> Agreed. I wouldn't bother with bond funds while using margin.


Yeah it's quite a beautiful sight. I have a $40k bond/GIC portfolio here, from which I could borrow $37k (that's 92% of the account value!) with next to zero danger of a price crash. I love my bonds.


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## andrewf (Mar 1, 2010)

A pity they pay you next to nothing!

Really, what's weird about this situation is the high margin requirements on bond funds despite their very low volatility. Maybe that will change as bond funds go from being merely big to enormous.


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## james4beach (Nov 15, 2012)

I took a more detailed look at my TD Waterhouse account and they may be more generous on margin, even compared to Interactive Brokers. (higher interest rate though)

At IB there seems to be a 50% margin requirement overnight.

But at TDW it looks like if the stock is on an IIROC "securities eligible for reduced margin" list, the margin requirement is only 30%. This seem to be the case in my account holding ETFs, where I could apparently borrow 70% of the account value.


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## andrewf (Mar 1, 2010)

IB uses the same list from IIROC, as far as I know, to offer reduced 30% margin requirement on liquid stocks. I was looking at the list today, and it seemed odd that XIU was not eligible but smaller funds like HFR are. Unless I misread the file.


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## james4beach (Nov 15, 2012)

andrewf said:


> IB uses the same list from IIROC, as far as I know, to offer reduced 30% margin requirement on liquid stocks. I was looking at the list today, and it seemed odd that XIU was not eligible but smaller funds like HFR are. Unless I misread the file.


Hey I think you're right, XIU doesn't seem to be on the list (link). This is really weird. ZCN is on the list as are most of the BMO ETFs. So is iShares XSP (the C$ hedged S&P 500) and the bond ones, XSB, XCB, XBB.

But I don't see any of the major iShares stock ones - XIU, XFN, XEG. I wonder what the explanation behind that is! Would love to know.


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## james4beach (Nov 15, 2012)

Answering my own question here as I just learned this from IIROC.

True, XIU is not on the regulatory list of securities for reduced margin.

Turns out this is because it's on another list, floating margin rates which are even lower margin rates. You can see it at IIROC's web site, Rule Book -> IIROC Dealer Member Rules -> Supporting Schedules -> Regulatory Documents -> Margin rate. "List of Floating and Tracking Error Margin Rates for Qualifying Canadian and U.S. Index Products"

This lists indexes that are eligible (such as TSX 60) and they explain that traditional, non-leveraged ETFs will map to these. That means XIU.

Mystery solved


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## CanadianCapitalist (Mar 31, 2009)

It's not clear to me why one would borrow against bonds held in a taxable account (I understand why this might be with illiquid GICs). Why not sell the bond position to fund the real estate purchase?


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## james4beach (Nov 15, 2012)

Yeah it doesn't sound wise to me either.

I mixed up two issues. One is that some people do borrow from margin accounts for RE purchases (I presume they're borrowing against stocks because they expect those stocks will continue to have high performance, and don't want to kill their long term positions).

Second issue is that if you happen to have a bond & GIC account, like one of those ladders I posted about in this thread, you can borrow an enormous % against those securities... which may be great as an emergency line of credit or something, but probably silly for a RE purchase or anything where you will be borrowing for any significant amount of time.


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## Retiredguy (Jul 24, 2013)

TD Waterhouse is currently 3% (for over 100K) not 4.25. Never heard of Interactive Brokers but will do some research. No I don't use margin for RE but have given it some thought - My plan involves me selling stocks and gifting money to my kids for their principal house mortgage. I buy the stocks back and interest for me becomes deductible. Kids gift me a monthly amount which I use to pay back my margin account and interest. I gift them the resulting tax savings from the interest expense. Risks are that the kids default on my unsecured "gift" to them. I also would crystalize capital gains tax on the original stock sale.

Net effect is that the kids mortgage interest would become deductible for them.


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## andrewf (Mar 1, 2010)

Here's the link: http://iiroc.knotia.ca/Knowledge/View/Document.cfm?Ktype=445&linkType=toc&dbID=201210359&tocID=15

Am I understanding correctly that XIU has a maintenance margin of 4.25%? That's ridiculously low. 22 times leverage?


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## james4beach (Nov 15, 2012)

andrewf said:


> Am I understanding correctly that XIU has a maintenance margin of 4.25%? That's ridiculously low. 22 times leverage?


I think those are 'minimum' guidelines. TD Waterhouse appears to margin XIU at 30%, same as the other securities for reduced margin (all my ETFs seem to be 30% margin levels).


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## james4beach (Nov 15, 2012)

A warning to anyone who stumbled across this thread ... brokers can and do change margin policies sometimes with very little notice !!

See this thread; a bunch of us got hit by this

*Even if you had liquid major ETFs*, you could have gotten a margin call at Interactive Brokers... I presume other brokers could do the same. I will no longer use margin at IB for long periods, personally. Too dangerous.


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