Secure Your New Home with an Asset Based Line of Credit

Background

Cash has always been king when purchasing a home, especially in today’s hot housing market. Being able to purchase a home with cash can give you a significant advantage over the other potential buyers. The ability to purchase a home in cash is not feasible for many people without having to draw from their taxable investment portfolio. Having to pay capital gains tax in order to purchase a home reduces the size of your portfolio, and depending on the portfolio may cause a significant tax bill.

Becoming a cash buyer without having cash

Asset based lines of credit (ABLOC) offer an attractive way to acquire liquidity from your portfolio without the tax drag of selling individual investments. ABLOC’s allow individuals to take a line of credit out against their portfolio, and if they so choose, use that cash to purchase a new home. A headwind to this strategy is that interest rates on ABLOC’s can be much greater than that of a traditional mortgage.

You get the best of both worlds

What if I told you there was a way to combine the liquidity and tax advantage of an ABLOC with the low interest rate and stability of a traditional mortgage? When structured correctly with your bank, you can use a secured line of credit based off of your portfolio and then soon after you purchase the home, use a traditional mortgage to pay off that line. This gives you the ability to appear as an all cash buyer while also eliminating the higher and floating interest rates that can come with an ABLOC. This strategy requires clear communication with your bank, is an effective way to save tax dollars, and can continue to grow your portfolio.

Risks

Since the secured line is collateralized with your portfolio, there is volatility risk with this strategy. If the market takes a significant downturn, this can result in you having to deposit additional dollars into your investment account to meet the bank’s loan-to-value requirements. This risk can be somewhat mitigated by refinancing with a traditional fixed rate mortgage soon after purchase, but the risk due to market uncertainty remains. Additionally, due to the nature of portfolios, you will not be able to receive 100% of the value of your portfolio as a line of credit. This occurs because the amount of your line will depend on the underlying investments in your portfolio and the bank’s assessment of them and their risk.

Conclusion

If you are in the market for a new home and want to approach the sellers with an attractive all-cash offer, but lack the liquidity, an ABLOC may be the right choice for you. Setting up an ABLOC is relatively easy, but can take some time, so you might consider having one in place before you begin your home search. If you do not end up using the line, no interest will be due making it an attractive option. Given most ABLOCs are variable, however, refinancing with a traditional fixed mortgage soon after purchase does make sense in most circumstances. That said, it is important to remember that each situation is different and considering your full financial picture prior to making any financing decision is key. If you would like to learn more about ABLOCs, any member of your client centric team is ready to assist.