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You've worked hard to build your investment portfolio. Over time, those assets may have grown to become an important part of your overall financial picture to help you meet your long-term goals.
But when a significant cash need arises and your wealth is tied up in the markets, you shouldn't have to choose between your future and your now.
- Sell, and you potentially sacrifice growth, trigger taxes, and disrupt your strategy.
- Wait, and you may miss an opportunity.
A securities backed line of credit (SBL) gives you another path.
A securities backed line of credit unlocks liquidity without an immediate need to sell investment assets. Maybe a second home purchase is on the horizon, you are looking to expand your business, pay an unexpected emergency expense or just want more flexibility for everyday purchases. Eligible investors can borrow while remaining invested and focused on their long-term goals.
What is securities backed lending?
In simple terms, securities backed lending allows you to borrow against the value of certain, non-retirement investment assets. Rather than selling investments to generate cash, you may be able to use a portion of your portfolio as collateral to establish a line of credit.
The approval process is often simpler and faster than with traditional loans. Eligibility is driven primarily by the assets used as collateral and investors may benefit from quicker access to liquidity.
A key benefit to an SBL is that the underlying investments typically remain invested in the market, allowing you to continue pursuing your long-term growth objectives while gaining ready access to liquidity whenever the need may arise.
How a securities backed line of credit is used
An SBL can help you meet a variety of personal and business borrowing needs. Typical uses include:
- Real estate purchases or home renovations
- Business financing opportunities
- Tax payments
- Educational Funding
- Major planned purchases
- Unexpected expenses
- Bridge financing
- Refinance more expensive debt
However, the proceeds generally can't be used to purchase or trade additional securities, purchase MassMutual life insurance or pay off a margin loan balance.
A MassMutual financial professional can help you understand more about how a securities backed line of credit can help you meet your wealth management goals.
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To help that discussion, there are some advantages and disadvantages to consider.
Why consider a securities backed line of credit?
For investors with substantial non-retirement assets, securities backed lending can offer several potential advantages.
Maintain your investment strategy. As discussed, one of the primary benefits of an SBL is the ability to access funds when you need them without liquidating your investments. “Selling securities may disrupt a carefully constructed investment strategy and could cause an investor to miss future market appreciation,” said Linda Bestepe, head of MassMutual Wealth Management Lending and Banking Services. “By borrowing against eligible assets, investors may be able to obtain the funds they need while helping to keep their long-term investment strategy intact.”
Potential tax efficiency. When selling appreciated investments, investors may be subject to capital gains taxes. While circumstances can vary, a securities backed line of credit may help some individuals meet liquidity needs without immediately realizing taxable gains as the result of a security sale.
Flexible access to capital. Given that many securities backed lending programs are structured as revolving lines of credit, borrowers can generally access funds as needed, repay outstanding balances on a flexible schedule, and then borrow again if needed, subject to the terms of the loan.
Competitive terms. Many securities backed lines of credit have no application fees, maintenance fees, or closing costs. And, because the loan is collateralized by your non-retirement investment assets, interest rates may be more favorable than some other types of borrowing.
Risks of a securities backed line of credit
While securities backed lending can be a valuable planning tool, it is not appropriate for every investor, and there are important considerations you’ll want to keep in mind.
Market volatility can impact borrowing capacity. Because the loan is secured by investment assets, a decline in the value of the pledged securities may reduce available borrowing capacity. In some situations, it may trigger a maintenance call, where borrowers may be required to deposit additional assets or repay a portion of the outstanding loan balance. If those requirements cannot be met, pledged securities may need to be sold to bring the line back into compliance.
Interest costs apply. As with any borrowing arrangement, interest charges will accrue on outstanding balances. Depending on the loan, interest rates may be variable, which means borrowing costs may increase or decrease over time. If you're thinking about borrowing, take a moment to weigh the value of what the funds will help you achieve against the cost of borrowing.
Not all securities are eligible to serve as collateral. Each lender has its own eligibility guidelines. Some securities, account types, or concentrated positions may not be eligible to serve as collateral.
Securities backed lending is generally best viewed as one part of your comprehensive wealth management strategy. Carefully consider your cash flow needs, risk tolerance, and long-term objectives before establishing a line of credit.
Is a securities backed line of credit right for you?
For investors seeking liquidity while helping to preserve their investment strategy, securities backed lending may be worth exploring. When used thoughtfully, a securities backed line of credit can provide access to capital, financial flexibility, and the opportunity to remain invested while pursuing important personal or business goals.
To learn more about whether securities backed lending may be appropriate for your situation, speak with a MassMutual financial professional. Together, you can evaluate your borrowing needs, investment objectives, and overall financial strategy to determine whether this approach aligns with your long-term goals.
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Frequently Asked Questions about securities backed lending
Q. What is a securities backed line of credit?
A. A securities backed line of credit is a revolving line of credit that lets you borrow against the value of eligible non-retirement investments, such as stocks, bonds, exchange-traded funds (ETFs) and mutual funds, without selling them. You can draw funds as needed, repay over time with flexible payment options, and borrow again subject to the loan terms.
Q. How much can I borrow against my portfolio?
A. Your borrowing limit is based on a percentage of the market value of your eligible collateral, and the exact amount depends on the types of assets you hold and your lender's underwriting guidelines.
Q. Are the interest rates on a securities backed line of credit fixed?
A. Most securities backed lines of credit carry a variable interest rate that moves with a Secured Overnight Financing Rate (SOFR) based index, so your borrowing cost can rise or fall over time. You generally pay interest only on the amount you draw, not the full credit line.
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