Posted on: 03-08-2021 in Investments
Lombard lending is probably a term you have either never heard of or are unsure what it means.
When it comes to expanding your portfolio, freeing up funds to reinvest can be difficult. So, if freeing up cash is a limitation, then Lombard lending could be the solution.
The financial world is full of jargon, and you may be wondering, ‘what is Lombard lending?’ In this article, we shed some light on the subject and look at the pros and cons.
A Lombard loan is a specific type of loan where you borrow against your marketable assets. In other words, your assets act as ‘collateral’ and protect the lender from risk.
Think of a Lombard loan as a similar method used by banks when you want to buy a property. The bank uses the property as collateral when they lend your money in the form of a mortgage.
The type of assets you can borrow against is what typically separates a traditional loan and a Lombard loan.
With Lombard lending, the type of assets you can use as collateral are those that can be liquidated easily. Some common examples include:
So, why would you choose a Lombard loan over a traditional borrowing method? There are main reasons – speed and flexibility.
New investment opportunities can come up at any time. The trouble is, when opportunities come up out of the blue, it can be difficult to capitalise if all of your money is tied up in other investments.
If you were to try and raise the money yourself, you would first need to liquify your current investments. Once the transaction has gone through and you have the liquid capital, you would need to reinvest in the new venture.
The world of investing is a fast-moving one, and sometimes you don’t have time to hang around. This is where a Lombard loan can provide the solution.
By using your current investments as collateral and borrowing the money, you have far greater flexibility. However, there are two other significant benefits to a Lombard loan.
Firstly, selling certain assets could trigger costly tax charges. Secondly, when you use assets as collateral, you still retain ownership.
Because you still own the assets, you will still benefit from their growth and future payments through interest or dividends.
Lombard loans are typically a short-term method of borrowing. Terms on these types of loans can range from as little as one week up to 24 months.
Because a Lombard loan carries a lower risk for the lender, interest rates are usually lower. Of course, the type of assets you leverage will factor in and influence the interest rates.
Your assets will also determine how much you can borrow. The parameter used to determine how much you can borrow is the loan-to-value (LTV) ratio.
The LTV can vary greatly depending on the bank, the assets you leverage and other factors. Generally speaking, the LTV is around 60-70%. This means at 70%, you can borrow $70 for every $100 of the value of your assets.
On the topic of LTV ratios, this brings us to the limitations of Lombard lending.
Investors in various circumstances may benefit from a Lombard loan. However, they can be particularly beneficial for those who do not have a proven income stream.
For example, those who are self-employed or retired typically have a difficult time securing a loan. By leveraging your assets, you can provide the bank with the security they need to lend.
Whether you plan to use a Lombard loan for a property investment or invest in the stock market, it’s essential to be aware of the risks.
As we mentioned earlier in this article, one of the advantages of Lombard lending is you retain your assets.
While this is beneficial because you continue to benefit from any increase in their market value, it can also be a negative.
Remember, the assets you use as collateral must be greater than the loan amount. Changes in the market could result in those assets devaluing.
If your assets were to decline in value, you would need to either provide additional assets or reduce the outstanding loan amount.
A Lombard loan can be a valuable tool for investors looking for flexibility. However, there are things to consider and risks to factor in before making a final decision.
With that in mind, consider speaking with an expert who can ensure that any decisions you make fit your overall strategy.
At Holborn, we have successfully worked with clients for over 20 years to reach their investing and financial objectives.
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