It’s a tough dilemma: you need cash to pay for a home renovation, to cover some honeymoon costs, or to take advantage of a market opportunity, but the only way you can quickly access it would be to sell some of your investments. One strategy that’s often overlooked is asset-backed lending — that is, borrowing money against something you own, like your home or investment portfolio.
Keep in mind that while borrowing can be a powerful tool, it isn’t risk-free money. It comes with interest payments at variable rates, in addition to the principal loan amount. And when you borrow against your assets, you risk losing those assets if you can’t pay off the debt.
What is a home equity line of credit (HELOC)
A HELOC is a revolving line of credit where your house acts as the collateral. Your financial institution might offer one to you when you set up a mortgage, but you can usually take one out at any time, provided you qualify and have at least 20% equity in your home.
HELOCs have a credit limit of 65 per cent of your home’s purchase price or market value, and come in a couple of flavours. A HELOC combined with a mortgage, sometimes called a readvanceable mortgage or combined loan plan, pairs a classic fixed-term mortgage with a line of credit that gradually increases in size as the mortgage principal is paid down, until reaching the maximum 65 per cent credit limit. A standalone HELOC is just a revolving line of credit — the credit limit you receive, up to the 65 per cent maximum, stays the same, it doesn’t increase as you pay down your mortgage.
HELOCs typically come with much lower interest rates than a personal line of credit or other loan product, because your house is acting as the security that guarantees you’ll pay the money back. However, the interest rate on a HELOC is variable, meaning that the cost of paying your debt can quickly climb if rates increase. HELOC interest is only tax-deductible in Canada when the borrowed funds are used to generate income — like dividends or interest gained from investing. If you use borrowed funds for personal expenses like a renovation, the interest won't qualify for a tax deduction.
During what’s called the draw period, which lasts typically about 10 years, you can borrow funds as often as necessary, up to your approved credit limit, and only make interest payments. You can also make additional payments toward the principal if you choose.
After the draw period, the repayment period kicks in: you’ll no longer be able to borrow from the HELOC, and will need to start actively paying down the principal. Your lender will typically set a monthly payment plan until the principal is paid off, which could be as long as 10 to 20 years.
HELOCs also come with a major risk: if you aren’t able to repay what you owe, your lender could take your home.
What is a margin account?
A margin account is a special type of non-registered investing account that allows you to borrow from your brokerage to buy securities or withdraw cash. It’s a way to amplify your buying power: you’re able to buy more securities than you could have on your own, and any investment gains are yours to keep. The collateral for the loan is the securities in your margin account, including those you purchase on margin.
The margin itself is how much you need to deposit in your account to borrow. If you wanted to buy $5,000 worth of stock, and the brokerage required a 40 percent margin, you’d have to put $2,000 in your account - either in cash or margin-eligible securities. Then your brokerage would lend you the remaining 60 percent to buy the stock. If after buying on margin your securities increase in value and you opt to sell them, the brokerage will pay itself back first before distributing the profits to you.
Buying on margin is a higher-risk investment strategy. While it can increase your gains, it can equally accelerate your losses: there’s even the potential to lose more money than your initial investment.
You’ll also have to pay interest on the money that you borrow from your brokerage. The interest rate on a margin account is variable, often at a more favourable rate than other loans, and is typically calculated daily for the length of time you hold the margin position.
You have to maintain the minimum margin requirement in your account at all times. If your securities drop in value, your margin balance could drop below the minimum, triggering what’s called a margin call. Your brokerage will issue a warning to fund your account back up to the minimum, either by selling securities in the account or transferring in cash or other margin-eligible securities. If you don’t fund your account in a timely manner, your brokerage can sell the securities in your account.
What is a portfolio line of credit?
A portfolio line of credit is another type of margin loan. It’s a loan from your brokerage that uses your investment portfolio as security to ensure you’ll be able to pay the funds back. But while both a PLOC and a margin account use investments as collateral, a portfolio line of credit is typically used for personal purchases and expenses, such as buying a car or paying an unexpected tax bill, but can be used for investing as well..
A portfolio line of credit allows you to leverage your portfolio without actually having to sell securities, forfeit long-term investment growth, and potentially trigger a capital gains tax bill. While your investments are the loan collateral, they stay invested in the market so you can continue to build your wealth.
You’re typically pre-approved for a portfolio line of credit, and get to skip a credit check. The variable interest rate offered on portfolio lines of credit are typically lower than personal loans and lines of credit, and sometimes cheaper than HELOCs. Portfolio lines of credit also have very flexible repayment terms: you can opt to just make interest payments, and pay back the principal on your own timeline.
A portfolio line of credit allows you to borrow a certain percentage of your investment portfolio’s value, though it’s typically less than you can borrow in a margin account. But borrowing at or close to your credit limit can be risky: in the event of a market crash that knocks down the value of your portfolio, your loan amount could quickly exceed the maximum allowable limit. That would trigger a requirement by your broker to fund your investment account, either with cash or by selling or depositing eligible assets. That’s why borrowing limits for portfolio lines of credit are generally lower than margin and other lines of credit, to buffer against this kind of scenario.
HELOC vs. margin vs. portfolio line of credit
HELOC | Margin account | Portfolio line of credit | |
|---|---|---|---|
| Collateral | Home | Investment portfolio | Investment portfolio |
| Primary use | Life expenses | Buying securities (and life expenses) | Life expenses (and buying securities) |
| Typical interest rate | Low | Low | Low |
| Risk of losing asset | Foreclosure | Liquidation of securities in margin account | Liquidation of portfolio |
| Typical loan-to-value ratio (LTV) | 75 - 85% | Up to 75% | 50 - 70% |
How to choose which loan to use?
How do you know which loan is the best one for your circumstances? We’ve outlined some typical scenarios below to help you choose.
Scenario: You want to borrow $20,000 to renovate your kitchen, and are on the hunt for the lowest possible borrowing interest rate.
The HELOC would be the best fit here. While variable, the interest rate on a HELOC is typically lower than other loan options. It also has very flexible repayment timelines: you can repay the principal and interest within the HELOC’s draw period if you have the financial firepower, or just make interest payments until you reach the repayment period.
Scenario: You’re an experienced investor looking to borrow funds to buy a promising stock that you think will soon appreciate in value.
Buying on margin is likely the best option. A margin account is purpose-built for boosting your buying power in the market. The way interest is calculated on the loan — daily, for however many days you have a position open — means that if you’re able to profit off a quick market opportunity, you may not end up paying much interest.
Scenario: You’ve just made a successful offer on a home and need cash for the down payment. But your largest investment account is non-registered, and liquidating it would trigger a massive tax bill.
When time is of the essence, you can use a PLOC or a margin account: you can typically open the line of credit and receive funds quite quickly, as opposed to waiting days for a securities sale to settle, since you’ll usually be pre-approved for it. It lets you turn your portfolio into a liquidity tool without actually having to sell securities, pay a pretty penny in capital gains tax, and lose out on future growth potential.