Council Post: Using A Margin Loan Versus A Mortgage To Purchase Property (2024)

FAQs

Is a margin loan better than a mortgage? ›

Margin interest is only deductible up to the amount of your investment income and you cannot deduct it against your qualified dividends or long-term gains unless you give up the tax benefit on the dividends or gains. Therefore, you might not get the full tax benefit from a margin loan as you would with a mortgage.

Investors looking to make substantial asset purchases, such as real estate, have several financing options. For instance, those with large securities portfolios may consider using a margin loan instead of a mortgage when buying residential real estate. Here, interest rate risk is typically the deciding factor.

If your positions lose value too quickly and your margin loan balance exceeds the proceeds from the securities your broker closed out, you could end up with no securities at all, but still owing money.

Margin loans can be used in a variety of ways. They can increase your purchasing power, as well as your trading flexibility, allowing you to act on market opportunities when you don't have enough cash on hand.

They are simply looking to buy with the intention of selling to the “next person” at a higher price in the next month, week, or day. Very often, they borrow money on margin to super-charge their potential returns, with the intention of paying back the loan after they've sold at a profit.

The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions.

For margin interest to be deductible, the loan proceeds must have been used to purchase property held for investment — meaning property that generates interest, dividends or an annuity, or that produces a gain or loss upon its sale.

Non-marginable securities include recent IPOs, penny stocks, and over-the-counter bulletin board stocks. The downside of marginable securities is that they can lead to margin calls, which in turn cause the liquidation of securities and financial loss.

You can access cash without having to sell your investments. Pay back your loan by depositing cash or selling securities at any time.

Regulations require that you maintain a minimum of 25% equity in your margin account at all times. However, most brokerage firms maintain margin requirements that meet or, in many cases, exceed those set forth by regulators.

How long do margin loans last? ›

You can keep your loan as long as you want, provided you fulfill your obligations such as paying interest on time on the borrowed funds. When you sell the stock in a margin account, the proceeds go to your broker against the repayment of the loan until it is fully paid.

Simply put, margin means borrowing money and using an investment as collateral. By borrowing, an investor can generate liquidity not subject to income or capital gains taxation. However, the interest expense may be nondeductible if no investment income is being generated.

Instead, they can take loans against their shares. Securities based lending, securities based lines of credit, home equity lines of credit and structured lending are options for leveraging assets without selling them. These loans tend to have relatively low interest rates because they are collateralized.

Use debt as a tool

For example, very rich people might borrow money to acquire a company if they think they can improve its profitability. They might also borrow to fund a startup business, or use margin in their brokerage account to invest in more assets that will help them build wealth.

Yes, you can refinance a margin loan held with another provider.

If you can't repay money owed in a margin account and the company sends or sells the debt to collections, that could be reported and hurt your credit. However, what generally happens is that the company monitors how much you owe and your overall account balance.

Through the use of debt and leverage, margin may result in higher profits than what could have been invested should the investor have only used their personal money. On the other hand, should security values decline, an investor may be faced owing more money than what they offered as collateral.

Why buying on margin is a bad idea. Short-term movements in the market are almost impossible to predict, and there's always the risk of a black swan event like the coronavirus pandemic crashing the market. While the upside of margin trading may seem appealing, the downside risk is much greater.