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Can I use shares as security for a home loan?

A share portfolio can boost your serviceability and help you give proof of genuine savings.

If you've invested in shares, your portfolio could be a handy asset when you apply for a home loan. While lenders may not give you full credit for your share income, your portfolio could help improve your borrowing power. The shares can't count as security or form part of your deposit. But the dividends can count as income when the lender assesses your application.

Share portfolios as genuine savings

During the home loan application process, lenders will assess your income, debt and assets, and they will review how they affect your ability to service the loan.

One factor lenders look for is proof of genuine savings, such as regular deposits into a savings account. They will also take into account any shares you have held for at least three months as genuine savings, so holding a share portfolio in your name can help to increase your borrowing power.

Share portfolios as a source of income

When assessing your ability to repay your home loan, banks will take your investments into account. However, because shares fluctuate in value, most lenders will only accept up to 80% of your investment income.

Lenders also won't look at the total value of your share portfolio when assessing your serviceability. Rather, they'll look at the dividends you receive from your portfolio. Lenders will accept regular income from managed funds, too.

Why won’t shares be accepted as part of my deposit?

One thing a share portfolio can't do is serve as part of your deposit. As an example, let’s say you need $100,000 for a home loan deposit and $50,000 of your savings is tied up in shares. Unfortunately, your bank will not accept the shares you own as part of your deposit.

The deposit for a home loan needs to be in cash, or held as equity in another property. This allows the lender to limit their exposure to risk. If you default on your loan repayments, the lender needs to recoup their money, so they want it to be easy to access (ie cash). They don't want to have to sell the property in question, but also go after your shares in order to recoup losses.

The value of your share portfolio rises and falls all the time. So while your portfolio might be worth $50,000 now, in 12 months’ time the value could have dropped to $40,000 or even less, which would have a huge impact on the amount you borrow and your ability to service the loan.

What are my options?

One solution to this problem is to sell your shares and use the resulting proceeds to cover your deposit. This is a simple way around the problem and if you sell enough shares to raise at least a 20% deposit, you can avoid the cost of lender’s mortgage insurance (LMI). Just remember to factor the cost of any capital gains tax you have to pay into your calculations.

However, this may not be the most convenient solution for you if the share market is underperforming at the moment or if you view your stocks as long-term investments. If this is the case, you might want to consider taking out a margin loan. These loans allow you to borrow money to invest and use the shares you own as security, and could help you raise enough funds for a home deposit.

However, margin loans are for experienced investors only and come with plenty of risks attached, so research all your options thoroughly before going down this path.

Looking for a way to grow your wealth and make sure your money is working as hard as possible for you? Check out our guide on investing $10k into super vs your mortgage to see which option is more profitable

What are margin loans?

  • Margin loans are loans allow you to borrow money to invest in shares or managed funds.
  • Your existing share portfolio or managed fund portfolio is used as security for the loan, allowing you to increase the amount of money you invest.
  • If your investment portfolio increases in value, margin loans let you take advantage of increased returns.
  • However, if the value of your portfolio drops, any losses you incur will be magnified.
  • Following the significant financial fallout of the GFC, margin loans have been declining in popularity in Australia.
  • Figures from the Reserve Bank of Australia show that the number of margin loans in Australia fell from 248,000 in June 2008 to 137,000 in June 2016.
  • By 2019, this had dropped further still to 101,000 loans.

How do margin loans work?

To help you better understand how margin loans work, let’s use shares as an example.

If you take out a margin loan to get funds to buy shares, the shares you own will need to be offered as security. So if those shares decline substantially in value, if you are unable to pay off your loan or if you are unable to pay a margin call , the lender has the right to sell your shares to recoup its losses.

Because they are complex financial products that come with a high level of risk attached, margin loans are best suited to experienced investors who closely monitor their investments on a day-to-day basis.

Pros and cons of margin loans

Pros

  • Access funds. Margin loans can allow you to access the funds you need to take advantage of investment opportunities.
  • Achieve your financial goals. With funding from a margin loan, you can invest for a secure and comfortable financial future.
  • Bigger returns. With more money to invest, you can take advantage of the potential for higher returns.
  • Diversify your portfolio. Margin loans ensure that you have a larger amount of money to invest, and you can use these extra funds to diversify your investment portfolio.
  • Tax deductible. Depending on your circumstances, the interest you pay on a margin loan may be tax deductible.

Cons

  • Potential for losses. When you borrow through a margin loan, you run the risk of incurring substantial losses. In a worst-case scenario, you could even end up owing more than the amount you originally invested.
  • Margin calls. Unexpected margin calls can force you to sell your investment at a low price and have the potential to put you into financial difficulty.
  • For experienced investors only. Margin loans are best suited to experienced investors only who fully understand the risks involved.

Image: Shutterstock

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