Or would the tax office find out that you didn’t put down 25% in cash and complain?
I don’t think the tax office cares, why should they? However the bank providing the mortgage for the remaining part will care about it and they may not accept you.
If the rental property is kept to your name I guess the bank should be aware of your full financial condition including all debts (and assets) in order to make their assessment. Apart from that I oersonally see no logical issue in using cash from a margin loan, but that is just me
I guess the bank needs the latest tax declaration + pension funds statements. How would they know whether one sold some stocks or borrowed money against them?
If you don’t tell them that you have a huge debt, you are lying and that could get you into trouble.
By declaring on a mortgage agreement that your down payment has to be hard cash and can not be a loan from a broker, relative, bank etc.
There are banks which turn a blind eye to this and don’t really want to know where your down payment is coming from as long as you have it in cash. I think others have also shared some information in other threads.
Well, I honestly don’t see a difference between selling stocks to get money for a down payment and borrowing cash against stocks. If you have funds, you have them, if you don’t, you don’t. Worst case you can always sell stock funds and leverage your portfolio for example.
Do you have a debt when using a margin loan? In a way yes, but I’m not sure this is the right way of thinking about it. What you are doing is using leverage, not much different to when buying into a leveraged 3x ETF.
You will always be net-positive on IB, they will never allow you go negative and instead will sell off assets to deleverage you when stocks drop below margin requirements. Playing with fire, maybe, but having a huge debt is something else.
Yes, a loan is by definition a debt. You can have 10 million in assets and a mortgage of 500k, you are net positive, but it’s still a huge debt.
You have services which lend you money so you can put together your 20%. I see that they would typically ask you to bring 10% and would lend you the other 10% with an interest of 5-7%.
In the FAQ of one of those services, they don’t name any banks but mention they would work with “any banks accepting their model of financing”. They also say that in order to qualify for their financing, the interests and repayment of the loan should not be greater than 1/3 of the household income and the value of the property should not be more than 6 times your gross income.
If banks work with those financing models, they should also accept margin loans (which carry much lower interests as of now) in my opinion. However, transparency is probably key and I would use the threshold/conditions above as a rule of thumb of what the bank may require.
In 2010, I purchased a flat in Valais. The next year, the tax office sent me a letter asking for a copy of the deed of sale as well as a written statement regarding the source of the funds used to pay for this acquisition.
I just wrote that most of the money came from my own savings, while the rest was borrowed from my parents. Guess they were satisfied with my answers, they never wrote back.
It all happened the year after I finished my studies and started working full time, so it may be because they noticed a significant change in my financial situation.
So, borrowing might be fine from the tax office POV.
Yes, in my situation, it’s probably more an issue with hidden wealth or money laundering.
In your particular case, you are clearly not supposed to use foreign funds to buy a property. The banks ask you do declare all existing liability, this includes mortgages, bank loans, vehicle leasing and of course lombard loans (or margin loans). If the margin loan is not on your previous tax statement, it can easily go unnoticed, except if you stop paying interests. I would not call it “fraud” but it’s clearly in the gray zone.
So if you sell some stocks and use that money as down payment for the property, everybody is happy. It is your money after all. Now, is it anybody’s business if later you decide to buy those stocks back on margin? Or use any other form of leverage on your remaining investments?
To me this is splitting hairs and not very meaningful. Unless the terms of contract don’t clearly prohibit it, I’d rather focus on managing risks. Buying real estate on mortgage is a leveraged investment, and so is buying stocks on margin. Where do you accept how much risk, how do you manage it, what are the terms & obligations for each and how does that add up across the whole portfolio? That sounds like a more interesting discussion to me.
In my assessment so far: Using a margin loan in your IB portfolio and having a mortgage for a rental property are not mutually exclusive, but whether this is a good idea (or how much) is a totally different kettle of fish. I’m not personally considering real estate at the time, but might revisit this in the future.
If you sell the stocks, you have cash, the value of your stocks at that moment in time is realized and market fluctuations don’t affect it anymore.
If you get a margin loan with stocks as collateral, worst case scenario, your stocks get sold to meet the margin requirements but they don’t get sold at the price they had when you took the loan. It can be way less. This may affect your ability to service the mortgage.
I agree there are many other aspects of your finances that also affect your ability to service your mortgage, and conditions at the very moment you take the mortgage are not representative of what you may do later with your assets but all else being equal, and the borrower being employed with the ability to meet their current expenses, a borrower with no margin loan would present a lesser risk than one willing to go into margin to buy their house.
They have no control over what you will do next, they take some risks when lending money.
… but they do, and so does the law.
If the money used to purchase the property is not your own and comes with an interest (which is clearly the case if you borrowed it from IBKR) it can’t be considered like your own funds. Now, you may decide to hide it from the bank during negotiation, it’s up to you.
We were talking about contractual (legal) obligations. Should you find this conversation pointless, uninteresting or stupid, you are free to ignore it and start your own topic.
How about I pay only a fraction of the taxes I owe for 2022? I’d be practically borrowing from the tax office (at a better rate than IB!), I guess that would be fine?
What if I had some cash sitting on the side for an ongoing renovation of a fully paid property, I suppose I could get a mortgage instead to cover those costs and redirect those funds to the downpayment?
I see that I didn’t express myself clearly. Let me try differently. I’m less arguing about the mortgage provider side, and more about what margin trading at IB means. I think a misunderstanding of how IB margin trading works leads to us asking the wrong questions here.
Assume that you have 1 million in cash, and consider the following three scenarios:
- You keep 200k and transfer 800k to IB. With the 800k you proceed to buy 1MM worth of stocks.
- You transfer 1MM to IB. Before you buy any stocks you transfer 200k back, with the rest you buy 1MM worth of stocks.
- You transfer 1MM to IB and buy 1MM worth of stocks. Later you transfer 200k back.
In each of those scenarios the end result is the same, and each time the 200k is your money and nobody else’s. In fact, any money you transfer out of IB will be your money and you can do with it whatever you want. Any loan provided through the IB margin facility is against your stocks / securities and contained within your IB account. In effect it means that you give up some ownership rights to those stocks, and IB is now allowed to liquidate them whenever they feel it is necessary and without giving notice!
Of course you can tell your mortgage bank that you have leveraged investments at IB (e.g. current net value 800k, with leverage of 1:1.25 through margin loan). You can also tell them that you have some crypto that may go up in smoke any time now, whether the bank will care I don’t know. But the 200k is your hard cash. Otherwise the consequences are pretty much as @Wolverine noted in his post above.
I would say that in all 3 scenarii, you have a 200K (cash) - 200K (margin loan) = 0K cash position. In all situations, any cash you spend is borrowed and not really “your” cash, even though you get to spend it how you like.
It doesn’t matter if you have 200K in bank notes along with 200K of debt or no cash and no debt, in both cases, your exposure to cash is 0. What banks check is your exposure to cash, they (or rather the law) want you to have part of the value of the property as a cash position at the time when you acquire it. Granted, that’s a bit silly since you can later borrow against your assets and get in the same situation as you would if you had used a margin loan to get the downpayment on the house, but that is how it is.
That’s exactly my point, the final result is the same. Except that there is a situation in which you properly declared your liabilities before signing the contract.
Yes but then, while negotiating the second mortgage, your debt ratio could become the limiting factor.
I did it the other way around, I purchased an apartment first, then I built a house and wanted to keep the apartment for rental. Although I could justify that once rented, my old property would pay for itself and generate profit, I got rejected by some banks due to insufficient financial capacity.
You may also stop paying phone bills, insurances, electricity… it might be ok as long as nobody officially starts a claim.