Investment-backed lending: How to use your investments to secure a loan

Case study
Insights

Borrowing against the value of your wider investment portfolio can be a fast, convenient and flexible way to fund life’s many opportunities.

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Whether it’s buying a new home, investing in a business, paying a tax bill, or reacting to one of life’s curveballs, there are often times where the need for significant liquidity can be pressing.

Investment-backed lending, also known as Lombard lending, can be an efficient and flexible solution for these scenarios, providing high-net-worth individuals with quick access to funds when they need it most.

This type of lending can enable you to take advantage of opportunities in the market without compromising your long-term investment goals.

How do investment-backed loans work?

Investment-backed loans use your existing cash and investments as collateral for a loan. So 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 also be secured against single stocks rather than a diversified investment portfolio. This can be a familiar scenario for individuals who have significant holdings in their employer’s company or have sold a business in return for shares.

You can borrow against the underlying asset up to a certain percentage of its market value, known as the loan-to-value ratio. This value will depend upon the type of assets held and level of risk involved.

Common reasons for getting investment-backed loans include:

  • Purchasing a new property or funding renovations
  • Making gifts or loans to children or grandchildren
  • Investing in a business
  • Buying a luxury item
  • Refinancing existing borrowing
  • Reinvesting back into the investment portfolio

In practice: Investment-backed lending

Here is an example of how RBC Wealth Management enabled a client to fund other investment opportunities through the provision of a loan secured against their major stock holding.

Our client

  • A senior executive of a large multinational company listed on the New York Stock Exchange, with a net worth of over £100 million.
  • The client had been awarded shares in the business over time and had built up a significant position, with a holding worth over US$45 million.
  • The client was subject to “insider” restrictions on sales of their stock, such as “quiet periods,” where they are prohibited from buying or selling company shares for a certain period.

Their needs

  • The client wanted to fund external investment opportunities and other time-sensitive capital commitments while retaining their significant stock holding.
  • They required flexible arrangements that allowed them to better manage their future cashflow requirements. This included the ability to draw funds in both GBP and USD so they could meet their ongoing multi-currency requirements and better manage their foreign exchange exposure.

Our solution

  • Established a £12.5 million revolving demand loan facility for the client to draw funds from and repay as required. This included the ability to draw in several major currencies.
  • Accommodated up to a 60 percent loan-to-value ratio against the single line of stock.
  • Offered a 0.25 percent arrangement fee on the loan facility amount. The interest rate charged on the drawn amount was the Bank of England base rate plus a one percent margin.
  • Eliminated early repayment charges and commitment fees.
  • Provided a flexible, cost-efficient credit solution that allowed the client to reinvest elsewhere and diversify their holdings and currency exposure without having to sell down their significant shareholding. 

Is investment-backed lending right for you?

As our example shows, an investment-backed line of credit can be a valuable complement to your investment portfolio. However, before applying you should carefully consider the comparison between borrowing costs and potential investment gains and losses, as well as your appetite for risk.

Talk to a financial advisor to see how they can help you understand your borrowing options and support your wider wealth plan.

This document contains general information only. It is not intended to be specific investment advice, or an investment recommendation. Please bear in mind that the investments and services contained within this document may not be suitable for all investors. RBC 1880


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