Posted on: 24th August 2022 in Expats Finance
If you have a private banking account, you may have noticed your bank offering “Lombard loans” or “Lombard lending facilities”.
A Lombard loan can represent an interesting financing alternative for those with access.
They can help solve the short-term liquidity issues that some face when looking to raise additional capital for financial opportunities.
In this article, we look at Lombard loans and the pros and cons these products offer.
Large volumes of Lombard lending transactions flow among banks and other financial institutions on a daily basis.
The name ‘Lombard’ comes from a region in northern Italy. The Italian banking houses in the Lombardy Region had a rich history dating back to the Middle Ages.
These banks were famous for their collateral loans. Modern-day Lombard loans follow a similar system.
In general, a Lombard loan is a kind of loan that is backed by liquid assets from an investment portfolio.
Your assets are used as collateral against the loan, protecting the creditor from risk. So, if you fail to repay the loan, your bank may sell the assets to get the money back.
The mechanism is similar to a mortgage for a buy-to-let or commercial property. In this case, the house acts as a guarantee for your mortgage.
However, private banks offering Lombard loans use liquid securities such as stocks and bonds as collateral. Other investments such as life insurance policies can also be used to secure a Lombard loan.
There are several situations when you may need access to greater liquidity.
For example, you may want to pursue an investment opportunity as an investor. The financial markets move quickly, and you may need access to capital to take advantage.
Even with high liquid wealth, selling your existing investments to get the cash you need may not be the best option. You may prefer to remain invested, for instance.
A Lombard loan can act as a cost-effective and flexible financing solution. Instead of selling your assets, you can simply use them as collateral.
Lombard loan lenders typically offer them in all major currencies. They also offer a range of maturities, typically from one week to 12 months. At maturity, you can either repay the loan in full or roll it over (providing that you still have sufficient collateral).
Another advantage is the low cost.
Because the risk is limited by the collateral, the bank can offer lower rates. Again, this is similar to mortgage loans. Because a mortgage is backed by an asset, they tend to have much lower rates than products such as consumer loans and credit cards.
So, for individual investors, this type of asset-backed lending offers several benefits. Not only does this provide access to liquidity, but it gives more flexibility. The lending rate is often lower than other types of loans.
The London Inter-Bank Offered Rate (LIBOR) or standard base rates are typically used to set the interest rate for a Lombard loan.
The monthly loan repayments and interest rates are not standard across all Lombard loans. Every bank or lender will have a different policy, and loans are granted on an individual basis.
It is worth noting that lenders tend to offer lower rates than typically consumer loans due to the risk being lower for the lender. Those offering the loan have access to saleable assets if loan repayments are missed.
Although several factors determine rates and costs, the underlying assets play a big part. A diversified portfolio of premium stocks may help you secure a better rate.
There are always highs and lows in the stock market, and market volatility can cause your shares to drop in value.
The lender may ask you to top up and provide additional collateral if this happens. In other words, add additional assets to continue meeting the LTV criteria the lender sets.
You don’t need to be a millionaire to access Lombard lending facilities. Still, it’s common to require an investment portfolio worth at least £100,000. Some lenders may also set a minimum loan amount.
Remember, to take out a Lombard loan, you must have the financial assets as collateral. Usually, the market value of the assets needs to be higher than the loan amount. This is to provide a cushion for price fluctuations.
One of the metrics that both you and the lender will need to watch is the loan-to-value (LTV) ratio.
Generally, the LTV is typically around 50%, meaning you can borrow £50 for every £100 in assets. However, this can vary greatly depending on several factors.
For example, the maturity of the loan and the kind of assets can influence the LTV. More volatile assets such as stocks require a greater cushion and could lower the LTV.
When taking out a Lombard loan, you should always keep the risks in mind. This is especially true when using the funds to buy additional investments.
Leverage and flexible financing are a double-edged sword, and asset prices can go either way.
To secure a Lombard loan, the borrower uses their assets as collateral. Assets may include stocks, bonds, life insurance policies, or anything that is easy to liquidate.
They work in a similar way to mortgages. With a mortgage, the property is used as collateral by the lender. With a Lombard loan, assets are pledged instead
Lenders have different requirements, but you need a sizeable portfolio. Generally, you will need a portfolio valued at a minimum of £100,000.
The total cost of a Lombard loan will depend on the lender and several other factors. However, the assets you offer as collateral play a big part in the interest rate that a lender will offer.
A Lombard loan can be used for a variety of reasons. Business owners may use the loan to expand their business or finance a project.
As an investor, you can help to raise the capital needed to take advantage of investment opportunities. They could even help to raise the necessary capital to buy a second home or investment property. Doing this could help to bypass the mortgage process altogether.
Lombard loans are typically thought of as a form of short-term borrowing. They can range from as little as a few days or a few months.
Although all Lombard loans have different terms, the longest tends to be around two years (24 months).
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