Inverted Yield Curve

If you need cash for a big expense—say, to build a house, start a business, or put down the entrance fee on a retirement community—you may want to consider a portfolio loan or line of credit that uses your investments as collateral.

Here are answers to some frequently asked questions about borrowing against securities so you can decide if this strategy is right for you.

How do portfolio loans and lines of credit work?

The bank uses your savings—stocks, bonds, cash, and sometimes other forms of securities—as collateral to offer you a loan or line of credit.1 These loans and lines of credit typically have variable interest rates.

How much you can borrow is up to your bank, but you may be able to access 50% of the total amount of your investments, or even more.

What are the advantages of portfolio loans and lines of credit?

There are several reasons you may want to consider portfolio loans and lines of credit. These include:

• Interest rates are generally lower than they would be with a traditional loan.
• You won't have to sell your securities to fund your project. Because you don't have to sell your securities, you won't generate capital gains2 and owe income taxes on those gains. If you're 65 or older, you also don't have to worry about being pushed into a higher income bracket where you might owe income-related surcharges on your Medicare Parts B and D.3
• Your investments will still be growing for the duration of the loan. For example, if you're earning an average of 6% on your investments and the interest rate the bank offers is 3% or even less, the math is in your favor.
• The payments may be flexible. Portfolio lines of credit typically require interest-only payments. You can repay some or all of the principal at any time, then borrow against the line again later.4 A portfolio loan may require payments of interest and principal and a set repayment period. Make sure you understand these terms and have a plan for managing the debt.
• The interest on the loan is potentially deductible. As with traditional loans and lines of credit, you may be able to use the interest on the loan as a tax deduction.5 This is generally only an option if you used the proceeds to generate taxable income. For example, if you used the loan to make improvements to a rental property, purchase business assets, or make other taxable investments. Be sure to talk to your tax advisor, because not all interest is deductible.