ETFs / Stocks / Bonds as collateral for buying a house

[Idonthaveamustache]

Have any of you heard whether there are banks in Switzerland which accept ETFs / Stocks / Bonds as a collateral when buying a house?

An urban legend:
A colleague of mine told me that he knew someone who used his Bonds as collateral to buy a house and he was able to collect the premiums of the bonds.

Would something like this be possible with a dividend ETF like SCHD or CHDVD? So my idea is the following: Lets say I have 500K CHF in SCHD or CHDVD and I want to buy a house for 1 million CHF. Instead of selling 350K from my ETFs (to pay the 35% of the house) I want to use them as a collateral, so I only need to take up a loan of 500K and I am able to keep the dividends of these ETFs.

I am generally interested in any possibility where I can keep my dividend ETFs and use them as a collateral.

Thanks in advance.

[REandSTOCK]

You need to have 1 million CHF that you give to the seller. I don’t see it in your example.

[Wolverine]

Take out a margin loan and use the money to get a mortgage?

Margin cash loan from IB - MMM post

HI everybody! This was not possible for Switzerland back when I checked in 2018. Now I have a cash account so I?m not so motivated to change it just to test it. Does anybody knows if this is now possible in Switzerland as well? By simply transfer out more cash than you have on the account? Could be interesting for a couple of reason: invest emergency fund instaead of keeping it cash: withdrawing 10k for a car problem/dentist whatever out of 200k invested in ETF is a no risk move alternativ…

It’s probable banks would accept stocks as collateral (those that provide Lombard loans, at the very least) but they’d probably ask that you use their services for the custody, meaning higher fees, and would only count a percentage of them for their calculations.

Plus, you’d be exposed to stocks drawdowns, meaning the value of your collaterals could drop, potentially forcing you to quickly find another way to finance the potentially missing part of collaterals for the mortgage.

[Barto]

Here is a fictional example how it would work. Disclaimer: This is not financial advice. Caveat Emptor

If you have 500k CHF ETFs in UBS for example, you can ask UBS for a Lombard loan. You sign a document to pledge your investment account to UBS as collateral and authorising them to sell your assets to cover their loan should they need to, for example if the stock market declines (margin call). They will assess how much you can borrow but for the sake of the fictional example let’s say max 250k CHF.

You then have 250k CHF cash to put towards your property purchase and to reduce the size of your mortgage

As Wolverine says this is risky as you are exposed to a margin call if your ETFs decline. I would never suggest anyone take a Lombard loan against equities for more than 10% to cover a long term commitment like a house purchase (so in the example 50k CHF).

[Idonthaveamustache]

Thanks very much for your input.

So to sum up:
It is possible to use ETF/Stocks as collateral but I would need to keep some cash at hand in case a crash happens to not get margin called. Also interest rate and fees would be higher.
The only upside would be that I can collect the dividends (~15K a year).

So based on this I guess it is not worth it so I will just need to sell of 350K worth of shares to finance a 1 mil House.

[Barto]

Private banks will use this option for clients with high net worth. Still good to have the possibility to use this option for part of the financing in case you need it

It is more common to pledge 2 and 3 pillar. there are threads on this forum about this

[Wolverine]

@Idonthaveamustache

The only upside would be that I can collect the dividends (~15K a year).

You’d get to keep capital gains too so the returns would probably outmatch the interests on the loan when the market goes up. You’d still assume the risk of your ETFs loosing value, though.

@Idonthaveamustache

It is possible to use ETF/Stocks as collateral but I would need to keep some cash at hand in case a crash happens to not get margin called.

I’d say it’s not worth it if you need/want to pledge an important part of your stocks/ETFs. If you limit it to a low amount, say 10% max, the risk is smaller (see @xorfish’s tables in the other thread: 9% pledged means their value would have to drop 85% to warrant a margin call for 40% margin requirements - the actual number used by the bank may vary). It’s the piling up of exposure to bad effects that can all happen simultaneously that would make me wary, not that specific risk in and of itself.

[Zerte2]

@Idonthaveamustache

So based on this I guess it is not worth it so I will just need to sell of 350K worth of shares to finance a 1 mil House.

Or you wait a few years and increase your cash pile thanks to a Mustachian lifestyle.