Securities-Backed Line of Credit: A Nifty Tool for Your Financial Toolbox

Most people are familiar with a home equity line of credit, or HELOC. A HELOC is a line of credit that allows you to borrow money against the available equity in your home. Similarly, a securities-backed line of credit, or SBLOC, is a line of credit that allows you to borrow money using the assets in your investment portfolio as collateral.

How an SBLOC Works

You apply for a line of credit based on your total portfolio value. You can then access that line of credit whenever you need it. Depending on the lender, you can typically borrow anywhere from 60% to 95% of your portfolio value. The total percentage of your portfolio available as a line of credit will depend on the mix between stocks, types of bonds, and types of ETFs or mutual funds.

For example, a portfolio consisting of 100% stocks might only offer a line of credit worth 60% of the total portfolio value, whereas a portfolio consisting of 100% government bonds might offer a line of credit worth 95% of the total portfolio value. 

Repayment: You make interest only payments each month and can repay principal at any time.

What can you use an SBLOC for?

• Home renovation

• Bridge loan/financing

• Business investment

• Real estate purchase

• Tax planning (e.g. push capital gains to following year)

Benefits

• Increased liquidity and quick access to cash when needed

• Avoid having to liquidate investments or portfolio

• Beneficial in down markets (i.e. avoid selling at a loss)

• Avoid unnecessary taxable capital gains

• Offers creative financing strategies for other business or investment opportunities

Things to Consider

• The interest rate is variable and can change monthly

• If the value of your portfolio drops, you may need to add funds to your account, or repay a portion of the line of credit

• Can only be used on non-retirement investment accounts

Real-Life Examples

Example 1: Investment Opportunity

My client, we’ll call him Matt, accessed $50k of his SBLOC in order to lend his parents money for about a year before his dad’s pension kicked in. The deal was for Matt’s parents to use the money for a business investment and return the money plus 10% interest to Matt. At the time, the average interest rate was about 9% on the line of credit.

Bottom Line:

• Matt was able to help his parents when they needed it.

• Matt earned about 1% interest on the money he lent (10% received less 9% paid).

• Matt was able to stay invested in the markets, allowing him to still participate in overall market growth.

Example 2: Home Renovation/Bridge Financing

Matt, my same client, bought his first home in August. He used his designated cash savings to cover the full down payment and all closing costs. However, Matt still needed to come up with $15k to cover the necessary rehab costs to make his new home livable. Rather than dip into his emergency fund savings, we decided to access $15k of his SBLOC. 

Bottom Line:

• Matt was due his standard yearly bonus of $20k in November.

• Rather than tap into his emergency fund, Matt accessed $15k of his SBLOC.

• Matt made interest only payments for three months and paid back the remaining $15k in November after receiving his bonus.

Final Thought

An SBLOC is a creative tool to keep in your financial toolbox that can come in handy in a number of different situations.

In addition to flexibility, a  securities-backed line of credit offers a lot of creative financing and investment opportunities. SBLOCs offer relatively quick access to cash without having to liquidate your investment portfolio. 

Does an SBLOC make sense to add to your toolbox? Schedule a complimentary intro call to learn more.