With my Swiss broker, I found out that I can get a surprisingly high lombard loan. Also, if in CHF, the interest rate is very good.
I need a sizable amount of money for a personal (non shares) investment I would like to make. I have a form of re-draw facility that I was going to use, but the interest rate is higher than the lombard loan by a couple of %.
I know there are lombard loan risks, but if I use it… and considering I have more than the lombard loan amount in the redraw facility, should a margin call happen, I just take the cash required from my redraw.
This seems logical, but people who have had experience with this can probably advise risks I’m not aware of.
I entered one million and it gives me 1.02% in CHF. Maybe you can use that as a bargain point with your Swiss broker, otherwise just move there…
Also you can get portfolio margin state in your account which gives you an 800% margin multiplier. That should be more than enough to cover for fluctuations in your shares.
IB does not issue margin calls. But you can select what equity should be sold first when your credit is not covered any longer. Or, better, just keep track yourself with a spreadsheet and then send money when needed or sell yourself. Anyhow, 800% margin multiplier is suicide, you don’t want to get near that.
Thanks. IB is a better rate for sure.
This is my first lombard loan. Looking at the rates, and flexibility of it… but now I look into it, it’s seems incredible. i.e. why isn’t everyone using it.
I feel there’s something I’m missing. Or maybe the people I hang around with also don’t know about it.
Because not everyone has the same risk apettite and risk tolerance, a lombard loan is leverage and can go quite bad if not managed/monitored correctly.
Lombard loans can be called back any time, that’s basically the biggest risk there is since a broker/bank only does this when either your shares get worthless or the market has so much trouble, that the broker/bank desperately needs the money to cover operations or other riskier investments → when getting margin called it will most probably be at the worst market time and will magnify your losses.
As long as your instrument to cover the margin loan is safe (like a diversified world ETF) and you don’t leverage too high, you should be fine.
If you would otherwise get a loan anyway, then a Lombard loans is certainly worth considering. It is almost always cheaper than a personal loan, and often on par with mortgages.
The oft-cited “risk” of your collateral losing value doesn’t really hold water, because you would have the exact same issue if you were unable to repay a personal loan or a p2p loan (your assets would be seized to repay the debt).
A possible problem is that the interest rate is not fixed, which makes it difficult to calculate the total cost in advance. With a personal loan you get the security of a fixed interest rate, but pay anywhere from two to four times as much for that benefit.
As long as you are logical and don’t get a loan that exceeds around 30 percent of your collateral, the risk of having to inject cash is minimal (almost non-existent). As with any loan, you will want to repay it as fast as possible to minimize interest charges.
My understanding is limited but it is that, by having direct access to your assets, the broker/bank can liquidate them on a whim which is both:
a protection (they’d presumably try to do that before it goes [too much] underwater, although that’s not perfect and stocks can skip the case “being worth your debt” and dive deeper before the broker actually reacts)
and a liability: with another kind of loan, creditors would have to follow a lengthy legal process before they could seize your assets, giving you more agency regarding when you decide to actually sell them during the window you have at your disposal.
The point that they can sell your assets (the broker) is a risk.
Has anyone experience a margin call before? How long have you got to move cash in if something happens?
I’m mindful that to move cash from my re-draw facility to the Swiss broker, when considering where it is coming from and paperwork on that side could be up to a week.
In my experience traditional brokers are slow with margin calls. They make a lot of money with margin loans and therefor prefer to wait. Since the introduction of portfolio margin (which is a maximum multiplier of 800% if your portfolio is diversified enough) the situation is even more relaxing.
Now, discount broker like IB are very strict; they don’t even issue a margin call but sell your stock directly. However, you can decide in which sequence they should do that. But of course, you have to decide well in advance.
I never had problem with margin. I have portfolio margin, but set a point for myself of maximum multiplier way under the 800% portfolio margin gives you. Then I have a spreadsheet with some googlefinance functions which would tell me when I have to sell or put in more money way before the broker does. Until 2020 when I started my momentum strategy I did use margin only in bear markets.
Since 2020 I use it constantly to get higher performance with higher risk in the momentum strategy. That worked out quiet nice, but I am considering lowering the margin multiplier as the position sizes get a bit too big lately.
And remember: the only good tip from your broker is a margin call!
Can you elaborate on that. Why is it okay to take on very high levels of debt for houses while it’s not okay here? One argument that comes to mind is that a house is less liquid; I won’t lose it so quickly. But real estate can also fall in value, and then I have a problem. I would even lose my house. I think more important is: Know your risks
For a home, banks are willing to give you a long term loan and margin calls are rare.
You don’t normally get this to buy stocks. Margins are immediately repayable on demand and your positions can be forcefully closed to pay off the margin.
I always use margin in my momentum portfolio. The margin rises when stocks go down until they are at 50%, then my margin multiplier stays at 300%, which is quiet a lot. Did hurt a lot but the money came back really fast… and much more of it. A bit of math: stocks go down 50% at 150% margin, I have 25% left. Then they go up at 300% margin, I need a 100% gain to get even (25x3).
In the dividend strategy I don’t use margin in normal times. But in bear markets I do. So it did hurt, but not that much as with the momentum strategy. And then the money came back in really big badges. The math for a 50% loss there is more favorable: I only need a 66% gain with 150% margin to get even.
It was probably the most hurtful action I had to take for a long time. Buying on margin in a bear market. But it was worth it. The stock market is pain and gain, first the pain, then the gain.
In forums questions about margin loans always pop up at in the last phase of a bull market. That is probably a sign to wait.
For me margin only works with some kind of market timing. And I hate market timing. Most of the times you should not do market timing. But only most of the times…
Honest question. How would/did you margin strategy play out in the 2007 financial crisis. Do I understand that the slow recovery in the stock market would have meant quite a few years with a high margin?
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