3 Ways to Borrow Against Your Assets

March 27, 2024 Chris Kawashima
What to know before using your assets as collateral.

Debt often gets a bad rap. But when managed responsibly, it can help you achieve your financial goals. In fact, the more assets you have, the more lending solutions you may have at your disposal.

Clients who have built up their net worth—whether in their homes or investment portfolios—could have broader borrowing options by using their own assets as collateral. But doing so exposes those assets to increased risk, so you've got to have the fortitude and investment knowledge to manage such debt effectively.

Let's take a look at three asset-backed lending solutions—and under what circumstances they might be most appropriate.

1. Home-equity line of credit

What it is: A home equity line of credit (HELOC) is a revolving line of credit, typically with a variable interest rate, collateralized by the equity in your home.

Generally, a HELOC has a 30-year term consisting of a draw period and a repayment period. The first 10 years are the draw period, where you can borrow as much as you need—whenever you need it—up to the limit established by the bank. Typically, during this time, you must make scheduled interest payments but have the option to pay toward the principal. Once the line enters its repayment period, however, you'll owe principal and interest for the remaining 20 years. 

When to use it: Although you can use a HELOC for many purposes, it's particularly well-suited for:

  • Home improvements: HELOCs are an attractive financing option if you're thinking about upgrading or you have to make necessary repairs to your property.
  • Major purchases or expenses: A HELOC can be a great way to fund a major purchase or cover a large expense. Even if you don't have an immediate cash need, establishing a HELOC can be a great way back up your emergency fund.
  • Debt consolidation: Interest rates on HELOCs may be lower than those charged by credit cards and personal loans, which can be helpful if you want to consolidate debt and reduce borrowing costs. However, because a HELOC is secured by your property, you should have a solid payoff strategy before you consolidate higher-interest-rate debt, since you are collateralizing your home.

P.S. Lenders need time to process a HELOC application because it requires a home appraisal and an underwriting review of credit and income, which can take weeks. Because of the time involved, it's best to open a HELOC well before you need the funds.

2. Margin

What it is: Just as a bank can allow you to borrow against the equity in your home, your brokerage firm can lend you money against the value of eligible stocks, bonds, exchange-traded funds, and mutual funds in your portfolio. Margin loans typically require a minimum of $2,000 in cash or marginable securities and generally are limited to 50% of the investments' value. Interest rates vary depending on the amount being borrowed but tend to be lower than unsecured lending options such as credit cards.

When to use it: Funds borrowed on margin are usually used for:

  • Additional investments: Active traders may establish a margin account as a way to take advantage of a trading opportunity when they don't have adequate cash on hand. If you use the funds to purchase investments that generate taxable income—including interest, nonqualified dividends, and short-term capital gains—you may be able to deduct the interest paid if you itemize your deductions. However, if the value of your margin account falls below the maintenance requirement—the minimum dollar amount that you must maintain in the margin account once you've tapped the funds—your brokerage will issue a maintenance call, which requires you either to deposit more money or marginable securities or to sell some of the assets held in your account.
  • Short-term liquidity needs: As with any line of credit, you can draw from and replenish a margin account for any reason, not just purchasing securities. A margin loan is a ready source of credit that may be used as a short-term loan for any need—and unlike a HELOC, there's no lengthy application process. But I can't stress enough the importance of moderating your borrowing. If you borrow too much and your portfolio's value declines before you repay the money, you could face a hefty maintenance call—or a large tax bill if appreciated securities are sold to meet the maintenance requirement.

P.S. It's important that the assets in your account are diversified. If you're overly concentrated in a particular investment, you could quickly find yourself below the required maintenance threshold if that investment declines considerably.

3. Securities-based lines of credit

What it is: Similar to margin, a securities-based line of credit offered through a bank allows you to borrow against the value of your portfolio, usually at variable interest rates. Assets are pledged as collateral and held in a separate brokerage account at a broker-dealer. Unlike margin, these nonpurpose credit lines may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into any brokerage account. Such lines of credit also tend to require more borrowing than a margin account. For example, a securities-based line of credit for $100,000 may require you to take an initial minimum advance of $70,000 upon establishing the line.

When to use it: Because of the potential large initial advance requirement that may apply, a securities-based line of credit is best for:

  • Bridge financing: We typically see a securities-based line of credit used for something that would otherwise be a short-term loan. For example, clients who wish to buy a new home before they've sold their current one have found that this type of credit line can provide a useful bridge between the two transactions.
  • Liquidity: When you need quick access to cash but don't want to sell your investments—which can trigger capital gains taxes—a securities-based line of credit could be a solution. Because of the high initial advance requirement, it's best to establish this type of credit line close to when you have an immediate cash need, such as a significant tax bill. Once you take the initial advance, however, you can use the credit line for smaller liquidity needs going forward.

P.S. A securities-based line of credit from a bank is subject to a high degree of risk, which you should be sure you understand before applying. Should the market value of the pledged collateral decrease, the bank may demand immediate repayment of outstanding obligations or require you to deposit additional cash or securities to the pledged brokerage account in order to avoid the sale of pledged assets. Pledging diversified assets can help reduce this risk. Be that as it may, you should keep an eye on the value of your pledged assets—and have a backup source of funds in the event of a demand.

Have an endgame

Margin and bank-offered securities-based lines of credit, in particular, are best suited for those savvy about the markets. You need to know how much risk you're taking on—and be vigilant about managing that risk.

What's more, it's crucial to develop a repayment strategy because unlike, say, a traditional mortgage, asset-backed loans generally have a more flexible repayment schedule. And whatever you do, try to pay more than just the interest due each month.

Asset-backed borrowing at a glance
  • Home equity line of credit
  • Margin loan
  • Bank-issued securities-based line of credit
  • Assets used as collateral
  • Home equity line of credit
    Real estate, including your primary residence and second home
  • Margin loan
    Eligible securities in most nonretirement accounts
  • Bank-issued securities-based line of credit
    Eligible securities, as determined by the bank, held in a separate pledged brokerage account
  • Minimum collateral requirement
  • Home equity line of credit
    Established by the lender and typically based on the requested line amount and the associated home value
  • Margin loan
    Typically, $2,000; some brokers may require more
  • Bank-issued securities-based line of credit
    Varies; many lenders require a $100,000 or more minimum loan value of collateral
  • Borrowing limits
  • Home equity line of credit
    A percentage of the appraised value of the home minus the mortgage value determined by the lender
  • Margin loan
    Typically, 50% of the assets' value
  • Bank-issued securities-based line of credit
    Based on the loan value of eligible pledged securities, which is typically up to 70% of their current market value; bank may require a large initial advance
  • Maintenance requirements
  • Home equity line of credit
  • Margin loan
    Typically, 30% of the assets' market value (below which you may face a maintenance call)
  • Bank-issued securities-based line of credit
    Varies; for example, some banks require the collateral to have a loan value equal to or exceeding the greater of $100,000 or the amount of the outstanding loans (below which you may face a demand for repayment)
  • Term
  • Home equity line of credit
    Typically, a 10‐year draw period followed by a 20‐year repayment period
  • Margin loan
    Revolving line of credit, meaning no set draw or repayment periods
  • Bank-issued securities-based line of credit
    Typically, a revolving line of credit
  • Approved uses
  • Home equity line of credit
    Acceptable for most purposes, but check with your financial consultant
  • Margin loan
    Any purpose
  • Bank-issued securities-based line of credit
    Most lawful purposes other than securities purchases or margin repayment
  • Ideal uses
  • Home equity line of credit
    ✔️ Debt consolidation 
    ✔️ Home improvements 
    ✔️ Short- or long-term liquidity needs 
  • Margin loan
    ✔️ Stock purchases 
    ✔️ Short-term liquidity needs 
    ❌ Long-term liquidity needs 
  • Bank-issued securities-based line of credit
    ✔️ Bridge financing
    ✔️ Short- or long-term liquidity needs
    ❌ Small initial borrowing need 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

When considering a margin loan, you should determine how the use of margin fits your own investment philosophy. Because of the risks involved, it is important that you fully understand the rules and requirements involved in trading securities on margin.

Margin trading increases your level of market risk. Your downside is not limited to the collateral value in your margin account.

Schwab may initiate the sale of any securities in your account, without contacting you, to meet a margin call. Schwab may increase its "house" maintenance margin requirements at any time and is not required to provide you with advance written notice.

You are not entitled to an extension of time on a margin call.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Nothing herein is or should be interpreted as an obligation to lend. Loans are subject to credit and property approval. Other conditions and restrictions may apply.

Investing involves risk including loss of principal. 

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.