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Background

I have a decent amount of money saved up, most of it invested in the stock market. Right now I'm thinking about getting a condo / house. I have more than enough in my stock portfolio to simply buy a property in the price range I'm looking at outright, without requiring a mortgage. However, interest rates are so low right now that it makes sense to me to get a mortgage anyways. In addition, there's tax benefits etc.

I'm aware of the general concept of securities backed loans, but the general rates I see from large companies are horrendous (~7-9%). On the other hand, I know I can get ~2% margin loans from Interactive Brokers, though I've never actually used them myself and I'm unsure if I'll run into any complications there. I haven't been able to find a specialized financial instrument to accomplish what I'm looking for.

I feel like there should be a way where I can obtain a mortgage using both the property and part of my stock portfolio as combined collateral, and get a substantially reduced mortgage rate in return.

Question

Is there a way that I can use my stock portfolio to get a lower rate on my mortgage? Ideally, it should be under the margin rate from Interactive Brokers.

Additional Info

  • Country: US
  • State: Likely WA, FL, TX, or NV
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    Getting a mortgage "for the tax benefit" makes no sense. You are getting a deduction to offset an expense you wouldn't have had in the first place. – chepner Sep 28 '20 at 13:51
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    Can you clarify: are you in the United States, Canada, or elsewhere? – C8H10N4O2 Sep 28 '20 at 14:25
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    @chepner It's not about the tax benefit. It's comparing gains from investments against loss on the mortgage interest. There are plenty of stable stocks that offer dividends that are higher than mortgage interest rates. – rtaft Sep 29 '20 at 15:01
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    Yes, but your expected loss in the early mortgage payments is much, much higher than the rate. You have a 3% interest rate, but well over 50% of each payment is lost to interest when you could have been reinvesting it in the stocks you sold to buy the house outright. A mortgage might still make sense, but it's more complicated than simply comparing annual growth rates to mortgage interest rates. – chepner Sep 29 '20 at 15:05
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    @chepner: It doesn't matter how much of the payment is interest. The math doesn't work like that. If 50% of the payment going to interest bothers you, you can voluntarily pay extra principal, but it won't make the loan a better deal. The interest payments aren't money you could have been reinvesting if you didn't take the loan - they're money you wouldn't have had if you didn't take the loan. They're a cut of your profit, as long as (after adjusting for tax) your investments return more than the loan's interest rate. – user2357112 supports Monica Sep 29 '20 at 18:52
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For perspective the rates you are seeing are not horrendous. It was not that long ago when people were happy to get a 8% mortgage because their parents percentage rates were in the teens.

I think you have two options with a third if you already owned a home.

The first, is the one you already know about the margin loan. This is very popular among some people with money. It would be best to use very stable stocks to secure the loan with a lot of wiggle room. You don't want a margin call.

The second is using an institution with a brokerage. For example if you use JP Morgan and Chase you can get perks for being a "private client". One of those perks is a break on your mortgage rate.

The third is to use a home equity loan to finance a home. If you put the loan in first position, get a fixed rate for a fixed term, the rates are very low. Typically about a point lower than the prevailing 15 year rate. Also the closing cost may be low or non-existent. The drawback is you have to own a property first. In your case you could buy the property from investments, then initiate the HEL, and then replenish your investments.

Editorially, even with these low rates there is no good reason to have a mortgage. If you can buy a property for cash, then you should just do so. Increasing your free cash flow is far more valuable IMHO.

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  • "The third is to use a home equity loan to finance a home." Did you mean something else here? – Acccumulation Sep 28 '20 at 17:58
  • @Acccumulation nope, You can get a HEL to refi a home. Putting it in first position greatly reduced the risk for the bank, and correspondingly the rate. – Pete B. Sep 28 '20 at 19:00
  • Do you mean take out a HEL and use the money to pay off the mortgage? – Acccumulation Sep 28 '20 at 20:47
  • @Acccumulation no, that would be silly. Why pay the cost of initiating a mortgage? Buy the house for cash taken from investment accounts, then get the HEL, then replenish the investments. – Pete B. Sep 29 '20 at 10:52
  • "The Chase Mortgage Rate Program offers Chase Private Clients rate discounts of 0.125% for total deposits and investments in personal accounts of $250,000 – $999,999 or 0.25% for $1,000,000+" Honestly the 0.125% - 0.25% probably doesn't even offset the increased costs of moving from Vanguard. Looks like margin is the only option I have. – saccharine Oct 11 '20 at 21:53
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I don't think adding stock as collateral will help you get a significantly better rate. The mortgage you'll get is already fully collateralized, since you won't be able to borrow more than the house is worth (and hopefully can put down enough down payment that the loan is over-collateralized to avoid PMI). If you default, the bank is most likely going to get their money back by foreclosing on the house - they won't need your extra collateral.

Since collateral is not an issue, then the basis for your rate is your credit worthiness. Do you have sufficient stable income to make the payments safely? Do you have any history of missed payments or overuse of credit? Those are the issues that will have a bigger effect on your mortgage rate.

If you want to reduce your mortgage rate, you could sell enough of your stock to get the loan-to-value well below 80%, significantly reducing the loss to the bank if you should default.

I'm aware of the general concept of securities backed loans, but the general rates I see from large companies are horrendous.

That's probably because these are desperation loans by people that have bad credit, and the fact that the collateral could go down in value very easily. Those facts increase the risk of loss, thereby requiring a higher interest rate to compensate for the risk.

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    If banks always get all of their money back from foreclosures, why would they care about credit worthiness? Why aren't mortgages risk free loans regardless of credit history of the borrower? – Acccumulation Sep 28 '20 at 17:36
  • Well, I said "most likely", but that may be a bit of an overstatement. Certainly after the costs of foreclosure are taken into account there may be some loss. But the point is that adding additional collateral is not going to make the loan "risk free" – D Stanley Sep 28 '20 at 17:41
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    @DStanley And, I would be willing to bet that there is a pretty good correlation between those who default on their mortgage and those who don't do a great job of upkeep. So the bank may not be able to sell it for as much as the loan was worth either – Kevin Sep 28 '20 at 19:17
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    Also look at it in terms of opportunity cost. The bank can give a loan to someone with bad credit who defaults and it takes them 5 years to foreclose, sell, and break even. The bank still loses when they break even, because they could have instead loaned that money to someone with better credit who would have paid them back with interest. – bta Sep 28 '20 at 22:38
  • Securities-backed loans aren't desperation loans. Desperation loans are stuff like payday loans and credit card debt. Stuff with double-digit or higher interest rates. Securities-backed loans are for people who have assets and just have some reason to prefer a loan over selling them - maybe tax reasons, maybe the assets are illiquid or something. – user2357112 supports Monica Sep 29 '20 at 18:30
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As the other answers have basically said, "No, because your borrowing rate is determined by your collateral". For a home loan you are paying one of the lowest rates because of the nature of that collateral being fairly secure from a historical perspective.

In addition, with a home loan you can get a fixed rate pretty close to 2%. With a margin loan you are effectively paying a variable rate which is determined most likely by some formula based on the prime rate plus some margin, or perhaps some proprietary formula that is not published. I doubt that IB will mind you borrowing for 15 or 30 years as long as your collateral (portfolio) maintains its value, but your interest rate most assuredly will not be fixed at 2% for that whole time.

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  • The lowest I can find on bankrate is ~ 2.6% and those are honestly companies I've never heard of. BoA is at 2.8. For reference, latest IB is at 1.1 % for <1M margin rates. Sure it's not fixed, but the difference is still significant. – saccharine Oct 11 '20 at 21:40
  • @saccharine I got an offer for 1.999% a few weeks back (APY was substantially higher for some reason, 2.5%ish). It didn't advertise any points or such but I didn't pursue it to see the fine print. – Michael Oct 13 '20 at 17:29

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