Lombard loan, is it worth it?

Investing / Others
21

I’m not commenting on the investment risk of this.

You can deduct margin interest from your taxable income. I’d suggest making sure that your dividend income remains higher than your margin interest to reduce the risk of being classified as professional trader.

However, depending on your tax rate, your DA-1 tax credit may get reduced due to the margin interest deduction. I.e. if your effective tax rate for income from your wealth is below 15% due to deductions, you won’t get a tax credit for the full 15% US WHT (as the basis is a double taxation agreement).

22

As the fed and other central banks have raised interest, most lombard loans increased the rates so it’s very expensive. I ran a 10-15% LTV loan on my IBKR portfolio, however their USD rate is was raised to 5.83% right now, so this is super expensive. I didn’t realize and it cost me quit a bit of fees.

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23

Low rates for the past 10 years heavily stacked the odds in favour of leveraged investing in stocks. It is no longer the case in my view

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24

Woah good point, looks like I’ve took out some EUR loan at almost 4%, CHF loans are fortunately still at 1.5%

EDIT: easily enough you can then just close the negative position with CHF, so my EUR loan is now a CHF loan instead :smiley:

25

The CHF margin interest rate at IBKR is also no longer 1.5. It’s 2.38% for the first 90k. See Margin Rates and Financing | Interactive Brokers LLC

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26

Ah right, the calculator showed me 1.5% for IBKR Pro for some reason

27

My personal take on IBKR lombard loans:

I used one last year to pay for cooperative shares (I had to cough up a 5-figure amount on relatively short notice) and spent the following months paying it off.

I’d use it again in a heartbeat (e.g. if I suddenly needed to purchase a car) and feel more confident keeping a fairly low emergency fund. I also played with the idea of keeping a few % margin but found that it simply isn’t for me.

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28

I believe the theory says to match the currency of the loan to assets and income, to minimise risk

The market expects that on average FX rates will move to off-set any savings you can make on interest rates. Otherwise there would be an arbitrage opportunity

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