I think that a lombard loan is always going to be more expensive compared to a SARON mortgage. IBKR was the cheapest at 1.5% even with less than zero interest rate compared to about 0.5% (or less) at it’s lowest for SARON.
Maybe use it for the down payment?
I’m not sure if it makes sense to calculate LTV that way, unless you want a measure like this for your own accounting? IB only consider your portfolio value as collateral, on which they require a 50% margin (overnight, if Reg T). They don’t care what you do with the withdrawn cash, it (or the house you buy with it) is not counted as collateral. If you go to the max. 50% you will have stocks liquidated at the first drop in stock value, no matter what your LTV may be.
It is the inverse. If you want to buy 100 USD worth of stock you need to put 25 USD on the table and IB will ‘loan’ you the rest. Your contribution is the ‘margin’. For a regular Reg T margin account you have a 25% intraday requirement, but need to bring it up to 50% overnight. There is also a portfolio type margin account, which is more flexible.
As far as I understand them IB does not provide actual margin calls, they simply start liquidating your stock portfolio as required to keep you above the margin requirements.
Exactly, they start liquidating you immediatly
Ok but will you get a mortgage loan without a job?
Ok this is confusing. When you want a mortgage loan, you need to come up with more collateral than the actual loan. You got 200k, take 800k loan and you put the 1m house as collateral, so the LTV is 80%.
So I thought that, analogously, if you give 1m stock as collateral, they give you 250k loan, and begin liquidating when your stock dips below 500k. This made sense because stocks are more volatile than real estate, so they are worse as collateral.
Now you’re telling me something confusing. You’re saying that if put 250k in stock as collateral, the bank can lend me 1m cash? I guess I’m still understanding it wrong.
I think you got it right and ChrisL confused something.
From https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
Not at all. You are both right. It is just that this thread is about margin lending, and @ChrisL is talking about margin trading.
If you are buying stocks on margin, then these stocks are your collateral. Similar to if you buy property with a mortgage, this property is your collateral. You can take more mortgage than you need, then it is your margin loan. But if stocks go down strongly, they will be sold and you get a first hand experience what “deleveraging” in bear market means.
I had a read of IBKR education materials, and now I think @ChrisL is actually right!
Check this out:
And here an explanation from the SEC:
The equity in your margin account is the value of your securities less how much you owe to your brokerage firm. FINRA rules require this “maintenance requirement” to be at least 25 percent of the total market value of the margin securities. However, many brokerage firms have higher maintenance requirements, typically between 30 to 40 percent, and sometimes higher depending on the type of securities purchased.
Here’s an example of how maintenance requirements work. Let’s say you purchase $16,000 worth of securities by borrowing $8,000 from your firm and paying $8,000 in cash or securities. If the market value of the securities you purchased drops to $12,000, the equity in your account will fall to $4,000 ($12,000 - $8,000 = $4,000). If your firm has a 25 percent maintenance requirement, you must have $3,000 in equity in your account (25 percent of $12,000 = $3,000). In this case, you do have enough equity because the $4,000 in equity in your account is greater than the $3,000 maintenance requirement.
So this is how I understand it currently:
Over time the value of your stock drops to 400k:
Your stock drops again to 360k:
Right, but these are two sides of the same coin, right? IBKR does not distinguish between lending or trading. They just check if you have at least 25% equity/loan in your account. So, effectively, you can borrow even three times as much you have.
So for example:
It does because it controls the collateral when you buy stocks with it on IBKR.
If you take it out to buy a house, it cannot call it in anymore (at least not as easy). You could spend it on Roulette, hookers and alcohol and they would not know.
(so basically no, you cannot take out 900k out of IBKR with 300k, but you can have 300k of equity and buy stocks up to 1.2 M - not advised of course from a risk management point of view, except if you leave the 300k in cash/bonds or whatever “low risk AAA rating” and put the 900 k into stocks).
You can’t borrow 900k because of the inital margin requirement of 50%. You can only borrow 300k.
No, you can’t. And that’s the point. You can buy stocks and whatever you want with borrowed funds, but they have to stay in your account. Otherwise your margin requirements are not satisfied.
And that what I meant talking about the difference between margin loan and margin trading.
Thanks, that makes sense. If you withdrew 900k from IBKR, your equity would go to -600k, which is of course forbidden.
So if you had 300k stock in your porfolio, the following requirement would have to be met:
(stock_value - withdrawn_amount) / stock value >= 25%
So the maximum withdrawn amount is:
withdrawn_amount <= stock value * 75%
So it goes like this:
Are you absolutely 100% sure about this? From what I see is that IBKR offers two types of margin accounts:
Are you sure you can’t get down to 25% initial margin with a portfolio margin account?
Ah maybe with portfolio margin, depending on your collateral. I was talking about reg T margin.
But keep in mind that the maintenance margin requirement can change any time for a single stock.
It happened during the “corona crash” and probably any time there is some kind of crash.
So you might think you are on the safe side above, say, 25% and then IBKR tells you that next week it becomes 50%.
Right, I am only using max values to understand how it works. I want to know the limits, not to use it in practice. I suppose if I had 1m at IBKR and wanted to finance a real estate purchase, I would maybe withdraw 250k for a longer period of time. In such a scenario I would not get in trouble until my stock value fell 50% to just 500k.
But for sure this margin is very practical if you want to quickly buy a dip in some stock, and you don’t want to wait for the bank transfer to come through. Or worse, wait for your next salary.
What I’ve dealt with in the past, is that I wanted to buy an even number of TSLA shares, like 100. But I always had to transfer too much cash to take price swings into account. With margin it’s so simple. You just buy the stock, you automatically get a negative cash balance, and a few weeks later you transfer the exact amount that you’re short.
By the way, you didn’t take into account that mortgage comes with cash downpayment of 20% (35% eventually), and this cash can’t work for you for the entire duration of the mortgage. Whereas the pledged stock still yields returns.
Actually I see another case for margin.
Let’s say your FIRE value is 1 MCHF, you need 40 kCHF/y (simple 4% rule to make it easy - just a concept study)
With margin you could do :
-Deposit 604 kCHF in IBKR in VT
-Take another 400 kCHF in margin
-With the actual 1% margin rate on that amount (4000 kCHF/y) you got your 40 kCHF income, and you pay less wealth tax (since you are actually only having 600 kCHF wealth) , plus you can deduct the 4 kCHF interest from your income
Would I do it ? Probably not, I am way to risk averse for that (100% stocks portfolio fine, but going margin… Nah).
I was considering this. The problem that I see is that unlike for example for a mortgage, there is no guarantee that the margin loan will be available in the future and conditions can change any time.
I think you understand this already, but I think it’s worth it to put some emphasis on Gesk’s point: what we can calculate are the current limits. IBKR can change them at any time and for any reason. This can particularly happen in bear markets. For example, in a few days, the collateral value of VWRL shares in CHF will apparently be 0. Not a big deal since VWRD seems to be keeping it’s collateral value, but an indication of how quickly things can change.
