Securities-Based Line of Credit: Right for You?

This type of credit line borrows against the value of your taxable, non-retirement securities portfolio and can provide quick access to liquidity when you need it. Instead of selling your assets to generate cash—which can trigger capital gains tax and undermine your long-term investment goals—you pledge your assets as collateral for the loan. At that point, they're moved into a separate broker-dealer account where they stay invested for potential growth. You can manage the assets or rebalance your portfolio as usual, as long as the value of the collateral remains adequate to support your borrowing. 

Given the unique considerations and potential risks, borrowing against an investment portfolio isn't a match for every investor. But it may be an option if you have well-defined uses for the funds and need:

• Quick, cost-effective access to capital: These lines of credit may charge lower interest rates than alternatives, such as personal loans and credit cards. They also tend to be quicker and less expensive to set up than other types of loans, because they don't carry application fees, origination fees, annual costs, or early repayment penalties.
• A short-term, bridge-funding solution: SBLOCs are often used as a bridge to finance a big expense, until an investor receives an expected windfall, such as a year-end bonus or the sale of a valuable property. Using a securities-based line of credit in this way also helps manage interest-rate risk. Because the rate on the loan is variable, being able to pay back the money relatively quickly means you'll be less likely to face a significant impact if rates rise.
• Liquidity without a tax hit: Borrowing against your securities allows you to access their value without selling them. This may be especially attractive for investors whose portfolios contain appreciated assets that would trigger significant capital gains if sold, or who believe their assets have high future appreciation potential. Just be mindful of the collateral demand, lest your investments drop in value and you are forced to sell at an inopportune time. The more volatile your investments, the greater this risk.

Once approved and the credit line is established, you can tap it immediately to satisfy your cash needs. You can use a securities-based line of credit for any purpose, other than to buy more securities or pay down existing margin balances. (For that, you would need a margin account.)

• Collateral and your credit limit: When you open an SBLOC, your borrowing limit is based on a percentage of the value of your pledged assets. Typically, up to 70% of the value of stocks, exchange-traded funds, and mutual funds can be used for collateral, and more than 90% of the value of certain Treasury securities. But be aware that most banks require you to pledge a certain minimum amount to establish a line of credit—often $100,000 or more.
• Variable interest rate: SBLOCs typically charge a variable interest rate, which is calculated using an adjustable benchmark, often the Secured Overnight Financing Rate (SOFR), plus a fixed spread. Generally, banks will offer lower rates for larger collateral portfolios. For this reason, investors sometimes pledge an entire portfolio to establish the credit line, even if the resulting borrowing limit is higher than they need.

Because your securities are used as collateral for your loan, you should keep an eye on their value—and ideally, keep your borrowing well below the limit on the credit line. If the market value of your pledged assets falls too low, your lender could issue a demand to immediately add more securities or cash, or to pay back part or all of your loan. Borrowing well below your allowed limit can help make such an occurrence less likely.  

It's also a good idea to have a plan for paying back the money before you agree to an SBLOC. Minimum monthly payments are typically interest-only, so you’ll only start to pay down the principal if you make more than the minimum payment each month.