Financial Planning

Leveraging Your Assets to Manage Your Wealth

March 9, 2023 Advanced
Borrowing against your assets can often act as a tool to manage wealth. Here's how to use debt strategically—even in some cases when you can afford to pay cash.

Over the long term, cash returns have historically underperformed stocks and fixed income. That's why seasoned investors put most of their wealth in assets with greater earning potential. The downside of doing so, however, is that liquidity can be hard to come by.

"Many people whose net worth is in the millions have relatively few liquid assets," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc. "So when they need cash, they generally have two options: sell those assets, which could trigger taxes and preclude future growth; or leverage those assets—which can keep their wealth invested for potential long-term growth and meet their short-term cash needs."

While the latter can be an attractive option, borrowing against your investments can be risky. Here, Susan shares four situations in which strategic borrowing may make sense.

Scenario 1: Paying taxes

Without ready access to cash, investors are sometimes forced to sell assets to cover a pressing tax bill—which can trigger its own taxable event. "Borrowing can help you pay a tax liability without incurring additional tax liabilities," Susan says.

However, even those with the cash on hand may find it more advantageous to borrow funds to pay taxes. Consider a business owner who sells an interest in her company for a $2 million profit. She could use the proceeds to pay the long-term capital gains tax obligation of 20%, or $400,000—plus a 3.8% net investment income tax if her adjusted gross income is more than $200,000 (more than $250,000 for married filing jointly). Alternatively, she could borrow against her assets—such as her home's equity or her investment portfolio—allowing her to keep cash for liquidity needs or even invest the proceeds from the sale for long-term growth.

Be aware, however, that borrowing against your investment portfolio, in particular, exposes you to additional risk in the event of a market decline. If the value of your collateral assets falls below a minimum threshold, you may be forced to deposit additional funds or face liquidation, which can have tax consequences.

Potential borrowing solutions

  • Home equity line of credit
  • Securities-based line of credit from a bank
  • Home equity line of credit
  • Securities-based line of credit from a bank

Scenario 2: Purchasing additional investments

A silver lining of a market downturn is the ability to buy the dip. When valuations are down, purchasing additional securities with borrowed funds can let you strike while the iron is hot. "As the market recovers, you could come out ahead if your investments experience a higher rate of return than what you're paying in interest," Susan says. Plus, you may be able to deduct the interest paid on the loan up to the amount of investment income earned, effectively lowering your total lending costs. Not all borrowing strategies apply, however; a nonpurpose securities-based line of credit issued by a bank (including Schwab Bank's Pledged Asset Line) cannot be used to purchase or carry securities.

Potential borrowing solution

  • Margin loan from a brokerage firm
  • Margin loan from a brokerage firm

Scenario 3: Buying real estate

Borrowing against your assets is also a way to enter a competitive real estate market. "Some housing markets are still pretty hot, and a lot of our clients have borrowed against their portfolios to make their purchase offers more competitive," says Erik Almazan, a senior banker at Charles Schwab Premier Bank. "While they could finance the purchase using a traditional mortgage, an all-cash offer—without the usual contingencies—is generally more attractive to sellers." In such cases, the buyer might refinance to a fixed-rate mortgage in the future and/or use the sale of their previous home to pay off the loan.

That said, most asset-backed borrowing solutions charge variable interest rates, making them less than ideal for long-term financing. Plus, there's no guarantee you'll be able to obtain a mortgage in the future on the terms you seek. Additionally, securities-based loans are subject to risks, including the lender's right to demand immediate repayment of obligations or the pledging of additional collateral. Failure to meet such demands may result in liquidation of your collateral.

Potential borrowing solutions

  • Home equity line of credit
  • Margin loan from a brokerage firm
  • Securities-based line of credit from a bank
  • Home equity line of credit
  • Margin loan from a brokerage firm
  • Securities-based line of credit from a bank

Scenario 4: Managing cash flow

Those who receive a majority of their income from cash bonuses and company stock may find borrowing an attractive way to manage their cash flow. "Many highly compensated individuals receive a relatively modest base pay that doesn't fully support their lifestyle, so they sometimes require short-term financing until they receive their bonus," Susan says. "Of course, they could sell existing stock to meet their spending needs, but doing so would prompt a taxable event and eliminate the future earning potential of those assets." In such cases, borrowing against your assets—such as your home's equity or your investments—to meet liquidity needs could be a preferable solution.

"We're not suggesting you borrow to pay the electric bill," Erik says. "Your regular income should be able to cover everyday expenses. But for big-ticket items like a new car or major home improvements, leveraging assets can allow you to generate the necessary liquidity without divesting yourself of stock or other investments."

Note that you'll generally be able to borrow less against a portfolio that's highly concentrated in a single stock than one with more-diversified holdings. And you can't leverage restricted shares, which are subject to blackout periods and other constraints.

Potential borrowing solutions

  • Home equity line of credit
  • Margin loan from a brokerage firm
  • Securities-based line of credit from a bank
  • Home equity line of credit
  • Margin loan from a brokerage firm
  • Securities-based line of credit from a bank

Review your borrowing strategy

A financial planner or wealth advisor can help you find the right lending solution and create a plan for managing debt effectively.

"As part of your plan, be sure to regularly evaluate whether the loan still makes sense in the current environment," Erik says. "The goal is to maximize your wealth over time. If your borrowing costs begin to exceed what those funds can earn elsewhere, it might be time to reexamine your strategy."

Evaluating your options

Depending on your assets and goals, you may have several borrowing options available to you.

  • Home equity line of credit (HELOC): A HELOC allows you to borrow against the value of your primary or secondary residence. Borrowing limits vary based on your credit rating and your home's value at the time of the line's creation, but the limit will not change even if your property's value declines. Interest rates typically are variable but are often lower than those charged by credit cards or personal loans. You can use the funds for many purposes, such as to pay a tax bill or cover a large purchase, though the interest is deductible only if the funds are used to "buy, build, or substantially improve" the property that secures the loan and your total outstanding debt on the property is $750,000 or less.
  • Margin loan from a brokerage firm: Although they can be used for any purpose, margin loans—in which your brokerage firm lends you money against the value of eligible stocks, bonds, and other holdings in your nonretirement portfolio—are most often used to purchase additional securities. A loan typically requires a minimum of $2,000 in cash or securities, and generally is limited to 50% of the investments' value. If the assets drop below 30% of their original value, your broker may require you to deposit additional funds or securities or sell some of the assets held in your account in what is known as a maintenance call. The interest you pay may be tax-deductible up to the amount of investment income you earn.
  • Securities-based line of credit from a bank: Like a margin loan, this line of credit allows you to borrow against the value of your investments, usually at a variable interest rate. Unlike margin, however, these credit lines are designated as "nonpurpose" loans, meaning they may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into a brokerage account. Such lines of credit also tend to require more borrowing than a margin account (Schwab Bank's Pledged Asset Line®, for example, has a minimum line size of $100,000 and an initial minimum advance of $70,000). As such, a securities-based line of credit may be best suited for large, planned cash needs, such as paying a sizable tax bill or as a bridge loan when financing real estate. Keep in mind, however, that these types of credit lines carry a high degree of risk and require that you keep securities pledged as collateral in a separate brokerage account maintained by a broker-dealer that may be affiliated with the bank (as is the case with Schwab Bank's Pledged Asset Line and the accompanying Pledged Account at Schwab).

Whichever route you take, it's important to give yourself sufficient breathing room. Margin loans from a brokerage firm and securities-based lines of credit from a bank, in particular, are subject to market pricing, and if your asset value moves lower, your available credit will shrink. "Depending on your risk capacity and tolerance, you may want to consider adding more marginable securities than strictly necessary, so you can have ample cushion against market volatility," says Susan Hirshman.

Depending on your assets and goals, you may have several borrowing options available to you.

  • Home equity line of credit (HELOC): A HELOC allows you to borrow against the value of your primary or secondary residence. Borrowing limits vary based on your credit rating and your home's value at the time of the line's creation, but the limit will not change even if your property's value declines. Interest rates typically are variable but are often lower than those charged by credit cards or personal loans. You can use the funds for many purposes, such as to pay a tax bill or cover a large purchase, though the interest is deductible only if the funds are used to "buy, build, or substantially improve" the property that secures the loan and your total outstanding debt on the property is $750,000 or less.
  • Margin loan from a brokerage firm: Although they can be used for any purpose, margin loans—in which your brokerage firm lends you money against the value of eligible stocks, bonds, and other holdings in your nonretirement portfolio—are most often used to purchase additional securities. A loan typically requires a minimum of $2,000 in cash or securities, and generally is limited to 50% of the investments' value. If the assets drop below 30% of their original value, your broker may require you to deposit additional funds or securities or sell some of the assets held in your account in what is known as a maintenance call. The interest you pay may be tax-deductible up to the amount of investment income you earn.
  • Securities-based line of credit from a bank: Like a margin loan, this line of credit allows you to borrow against the value of your investments, usually at a variable interest rate. Unlike margin, however, these credit lines are designated as "nonpurpose" loans, meaning they may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into a brokerage account. Such lines of credit also tend to require more borrowing than a margin account (Schwab Bank's Pledged Asset Line®, for example, has a minimum line size of $100,000 and an initial minimum advance of $70,000). As such, a securities-based line of credit may be best suited for large, planned cash needs, such as paying a sizable tax bill or as a bridge loan when financing real estate. Keep in mind, however, that these types of credit lines carry a high degree of risk and require that you keep securities pledged as collateral in a separate brokerage account maintained by a broker-dealer that may be affiliated with the bank (as is the case with Schwab Bank's Pledged Asset Line and the accompanying Pledged Account at Schwab).

Whichever route you take, it's important to give yourself sufficient breathing room. Margin loans from a brokerage firm and securities-based lines of credit from a bank, in particular, are subject to market pricing, and if your asset value moves lower, your available credit will shrink. "Depending on your risk capacity and tolerance, you may want to consider adding more marginable securities than strictly necessary, so you can have ample cushion against market volatility," says Susan Hirshman.

  • Margin loan from a brokerage firm: Although they can be used for any purpose, margin loans—in which your brokerage firm lends you money against the value of eligible stocks, bonds, and other holdings in your nonretirement portfolio—are most often used to purchase additional securities. A loan typically requires a minimum of $2,000 in cash or securities, and generally is limited to 50% of the investments' value. If the assets drop below 30% of their original value, your broker may require you to deposit additional funds or securities or sell some of the assets held in your account in what is known as a maintenance call. The interest you pay may be tax-deductible up to the amount of investment income you earn.
  • Securities-based line of credit from a bank: Like a margin loan, this line of credit allows you to borrow against the value of your investments, usually at a variable interest rate. Unlike margin, however, these credit lines are designated as "nonpurpose" loans, meaning they may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into a brokerage account. Such lines of credit also tend to require more borrowing than a margin account (Schwab Bank's Pledged Asset Line®, for example, has a minimum line size of $100,000 and an initial minimum advance of $70,000). As such, a securities-based line of credit may be best suited for large, planned cash needs, such as paying a sizable tax bill or as a bridge loan when financing real estate. Keep in mind, however, that these types of credit lines carry a high degree of risk and require that you keep securities pledged as collateral in a separate brokerage account maintained by a broker-dealer that may be affiliated with the bank (as is the case with Schwab Bank's Pledged Asset Line and the accompanying Pledged Account at Schwab).

    • Whichever route you take, it's important to give yourself sufficient breathing room. Margin loans from a brokerage firm and securities-based lines of credit from a bank, in particular, are subject to market pricing, and if your asset value moves lower, your available credit will shrink. "Depending on your risk capacity and tolerance, you may want to consider adding more marginable securities than strictly necessary, so you can have ample cushion against market volatility," says Susan Hirshman.

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    Depending on your assets and goals, you may have several borrowing options available to you.

    • Home equity line of credit (HELOC): A HELOC allows you to borrow against the value of your primary or secondary residence. Borrowing limits vary based on your credit rating and your home's value at the time of the line's creation, but the limit will not change even if your property's value declines. Interest rates typically are variable but are often lower than those charged by credit cards or personal loans. You can use the funds for many purposes, such as to pay a tax bill or cover a large purchase, though the interest is deductible only if the funds are used to "buy, build, or substantially improve" the property that secures the loan and your total outstanding debt on the property is $750,000 or less.
    • Margin loan from a brokerage firm: Although they can be used for any purpose, margin loans—in which your brokerage firm lends you money against the value of eligible stocks, bonds, and other holdings in your nonretirement portfolio—are most often used to purchase additional securities. A loan typically requires a minimum of $2,000 in cash or securities, and generally is limited to 50% of the investments' value. If the assets drop below 30% of their original value, your broker may require you to deposit additional funds or securities or sell some of the assets held in your account in what is known as a maintenance call. The interest you pay may be tax-deductible up to the amount of investment income you earn.
    • Securities-based line of credit from a bank: Like a margin loan, this line of credit allows you to borrow against the value of your investments, usually at a variable interest rate. Unlike margin, however, these credit lines are designated as "nonpurpose" loans, meaning they may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into a brokerage account. Such lines of credit also tend to require more borrowing than a margin account (Schwab Bank's Pledged Asset Line®, for example, has a minimum line size of $100,000 and an initial minimum advance of $70,000). As such, a securities-based line of credit may be best suited for large, planned cash needs, such as paying a sizable tax bill or as a bridge loan when financing real estate. Keep in mind, however, that these types of credit lines carry a high degree of risk and require that you keep securities pledged as collateral in a separate brokerage account maintained by a broker-dealer that may be affiliated with the bank (as is the case with Schwab Bank's Pledged Asset Line and the accompanying Pledged Account at Schwab).

    Whichever route you take, it's important to give yourself sufficient breathing room. Margin loans from a brokerage firm and securities-based lines of credit from a bank, in particular, are subject to market pricing, and if your asset value moves lower, your available credit will shrink. "Depending on your risk capacity and tolerance, you may want to consider adding more marginable securities than strictly necessary, so you can have ample cushion against market volatility," says Susan Hirshman.

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    Depending on your assets and goals, you may have several borrowing options available to you.

    • Home equity line of credit (HELOC): A HELOC allows you to borrow against the value of your primary or secondary residence. Borrowing limits vary based on your credit rating and your home's value at the time of the line's creation, but the limit will not change even if your property's value declines. Interest rates typically are variable but are often lower than those charged by credit cards or personal loans. You can use the funds for many purposes, such as to pay a tax bill or cover a large purchase, though the interest is deductible only if the funds are used to "buy, build, or substantially improve" the property that secures the loan and your total outstanding debt on the property is $750,000 or less.
    • Margin loan from a brokerage firm: Although they can be used for any purpose, margin loans—in which your brokerage firm lends you money against the value of eligible stocks, bonds, and other holdings in your nonretirement portfolio—are most often used to purchase additional securities. A loan typically requires a minimum of $2,000 in cash or securities, and generally is limited to 50% of the investments' value. If the assets drop below 30% of their original value, your broker may require you to deposit additional funds or securities or sell some of the assets held in your account in what is known as a maintenance call. The interest you pay may be tax-deductible up to the amount of investment income you earn.
    • Securities-based line of credit from a bank: Like a margin loan, this line of credit allows you to borrow against the value of your investments, usually at a variable interest rate. Unlike margin, however, these credit lines are designated as "nonpurpose" loans, meaning they may not be used to purchase securities or pay down margin loans, nor can the funds be deposited into a brokerage account. Such lines of credit also tend to require more borrowing than a margin account (Schwab Bank's Pledged Asset Line®, for example, has a minimum line size of $100,000 and an initial minimum advance of $70,000). As such, a securities-based line of credit may be best suited for large, planned cash needs, such as paying a sizable tax bill or as a bridge loan when financing real estate. Keep in mind, however, that these types of credit lines carry a high degree of risk and require that you keep securities pledged as collateral in a separate brokerage account maintained by a broker-dealer that may be affiliated with the bank (as is the case with Schwab Bank's Pledged Asset Line and the accompanying Pledged Account at Schwab).

    Whichever route you take, it's important to give yourself sufficient breathing room. Margin loans from a brokerage firm and securities-based lines of credit from a bank, in particular, are subject to market pricing, and if your asset value moves lower, your available credit will shrink. "Depending on your risk capacity and tolerance, you may want to consider adding more marginable securities than strictly necessary, so you can have ample cushion against market volatility," says Susan Hirshman.

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    Margin Financial Planning Security Based Loans

    Entering into a Pledged Asset Line and pledging securities as collateral involve a high degree of risk. At any time, including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans, Schwab Bank may demand immediate payment of all or any portion of the outstanding obligations, or require additional cash or securities to be added to the Pledged Account maintained at Charles Schwab & Co., Inc. If a Demand is not addressed, the pledged securities may be immediately liquidated without further notice to you, which may result in tax consequences.

    Schwab Bank, in its sole discretion, will determine at any time the eligible collateral criteria and the loan value of collateral.

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    Equal Housing Lender

    Home equity lines have a 10‐year draw period followed by a 20‐year repayment period. During the draw period, monthly payments of accrued interest are required. Payments will increase if rates increase. At the end of the draw period, your required monthly payments will increase because you will be paying both principal and interest. You may not use this home equity line as a bridge loan, for commercial purposes, to invest in securities, or to repay a margin loan.

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