Because your investments are the collateral for the loan, you’re typically pre-approved and your financial institution can lend you the funds pretty quickly.
A portfolio line of credit can be a useful tool if you see an investment opportunity or need cash for an important or unexpected expense, but don’t want to interrupt your investment growth or trigger a tax bill. But they aren’t without risk: if the value of your investments drop significantly, it could impact the loan amount you qualify for and in extreme scenarios trigger a need to add more collateral to your account to restore its value or pay back the loan.
How a portfolio line of credit works
When you open a portfolio line of credit, you’re receiving a loan from your brokerage and using your investments as a guarantee that you’ll pay it back. You can borrow up to a certain percentage of the value of your portfolio on a revolving basis — meaning you can borrow, pay it off and borrow again without having to re-apply for credit.
You can pay back the loan on your own timeline, and just need to make monthly interest payments based on the amount borrowed. Speaking of interest: because portfolio lines of credit are backed by your assets, they’re often offered at a lower interest rate than unsecured personal lines of credit, and can even be cheaper than HELOCs.
You’ll have to choose at least one investment account to use as collateral for the portfolio line of credit. Brokerages may not support using certain types of accounts as collateral, like registered retirement savings plans, registered education savings plans or accounts you share jointly with another person.
5 strategic ways to use a portfolio line of credit
Consolidating debt
If you have higher-interest debt in other places, such as on your credit cards, car loans, or personal loans, you can use funds from a portfolio line of credit to quickly pay them off. Then, you can pay down your consolidated debt amount at the lower portfolio line of credit interest rate on a schedule that works for you.
Making a competitive offer in real estate
You often need to move quickly in real estate, whether it’s to access extra funds to make a competitive offer in a bidding war or to pull together your down payment deposit after an offer’s been accepted. A portfolio line of credit can act as liquid cash in these scenarios, allowing you to avoid waiting for funds to clear or selling off assets that have growth potential.
Managing unexpected tax liabilities
If your income taxes come in higher than expected, dipping into a portfolio line of credit can bridge the gap. You’re able to pay the tax man on time without being forced to sell securities, a particularly useful tool if the market’s down.
Paying for a wedding or big trip — without selling assets
This ensures you can pay for the fun things in life without compromising your long-term investing strategy. For example, selling $50,000 worth of stocks from a non-registered account to cover the costs of your wedding could trigger a significant capital gains tax bill; borrowing that same $50,000 avoids that tax event and keeps your money invested in the market.
Having an emergency fund
If you don’t have the classic three to six months’ expenses in a savings account, or you’re in the process of rebuilding it, a portfolio line of credit can help you bridge the gap if an unexpected expense crops up.
Risks and considerations
Risk: Needing to add additional funds quickly
Your portfolio line of credit credit limit is a percentage of your portfolio — so if markets suffer a particularly volatile stretch and the total value of the cash and securities you hold drops significantly, you might not have sufficient collateral for the loan you’ve taken out.
If this happens, it will trigger the need to add more cash or qualifying securities to your investment account to restore your collateral, otherwise your financial institution will liquidate them. You can also address insufficient collateral by repaying a portion of your loan balance to bring it back within the limit, either with cash or by selling eligible securities.
Risk: Interest rate volatility
While portfolio line of credit interest rates tend to be lower than other loan products, they’re also variable. If the Bank of Canada (BOC) raises its overnight rate, it will likely become more costly to maintain, and pay down, your loan. As an example, here’s what interest payments on the same $15,000 portfolio line of credit balance would look like today and in 2023, at the top of the BOC’s rate-hiking cycle, assuming a portfolio line of credit interest rate of prime + 0.5%.
Interest payments today (Prime rate: 4.45%):
4.95%/12 = 0.41%
$15,000 x 0.41% = $61.50 per month, or $742.50 per year
Interest payments in 2023 (Prime rate: 7.2%):
7.7%/12 = 0.64%
$15,000 x 0.64% = $96 per month, or $1,152 per year
Benefit: Time in market
Borrowing against your portfolio keeps your investments growing in the market. While you’re covering your life expenses, your stocks and bonds continue to benefit from compounding, the snowball effect of any investment gains, dividends and interest earned being reinvested into the market and passively growing your wealth.
Keep in mind that when you’re using any line of credit, you’re borrowing against your future self. When you consider using a portfolio line of credit, you should have a clear and realistic repayment plan in mind.