Securing loan capital for construction projects: Strategies for accumulating the initial down payment
Dreaming of owning a property? You can leverage your investment portfolio to fund that dream, but consider other ways and be cautious. Here's a lowdown on using your securities to finance a real estate purchase wisely.
If you've got a promising investment portfolio, you might be hesitant to part ways with it. Especially for retirement savings. But if you're considering buying real estate, you might be wondering if it's viable to liquidate your portfolio to get equity or if there are other smart ways.
Stocks and other securities are a popular choice during periods of low savings interest rates due to the promise of long-term returns that usually exceed those of fixed-term deposits. A well-diversified portfolio can offer realistic returns between 6% to 8%. However, it's essential to remember that investing in securities always comes with inherent risk, as the future price movements cannot be predicted.
Be Open About Your Portfolio
"When your portfolio is performing well, it's understandable that you might want to hold onto your securities," says Thomas Saar, a real estate financing expert at Dr. Klein Financial Services. "And you should. It's possible to use your portfolio for a construction project without liquidating it. But not all banks and not all portfolios allow this."
In theory, an investment portfolio can be incorporated into your financing concept, both actively and passively. Real estate buyers should always inform their bank about their portfolio, even if they don't plan to use it, advises Dirk Eilinghoff, a real estate and interest rate expert at the consumer advice portal Finanztip. "This boosts your creditworthiness and may enable you to secure more favorable credit terms."
Pledging Your Portfolio
"Less common is the fact that an investment portfolio can also be temporarily transferred to the bank to secure better financing conditions," explains Thomas Saar. "However, this usually requires a well-filled, diversified portfolio for the bank to accept it."
If the bank accepts your portfolio as collateral, expect it to recognize only a portion of its value, applying significant discounts. "Recognized discounts can range from 40 to 50 percent", says Thomas Saar. "So, if you bring in a portfolio with a current value of 100,000 euros, you might get only 50,000 to 60,000 euros recognized as security, depending on the portfolio structure."
Negotiating the Deal
If you wish to use your portfolio to repay your mortgage, bargaining skills are a must. "For example, you can use the dividends to finance the purchase or redeem the remaining debt with the portfolio value after 10 or 20 years," explains Thomas Saar.
Banks Handle Customer Deposits Differently
Facing resistance from the bank? "In retail banking, incorporating a deposit into a classic mortgage is uncommon," says Dirk Eilinghoff. However, customers can still use their deposit by liquidating it and obtaining equity for their financing.
Remember the Tax Implications
If you decide to sell a deposit, you must consider potential tax consequences. Up to 27.99% of the profits can be subjected to withholding taxes, including solidarity surcharge and church tax. "This is a burden that investors would like to avoid," says Thomas Saar.
Source: ntv.de, Katja Fischer, dpa
- Real Estate
- Investment
- Securities
- Financing
- Taxes
Useful Facts
Utilizing an investment portfolio as collateral for real estate financing generally involves pledging securities or other assets within the portfolio to secure a loan – often in the form of a securities-based line of credit (SBLOC) or private credit lending. Here are the key aspects you should know:
- SBLOCs allow you to borrow against a percentage of your portfolio's value, with typical LTVs between 50% and 70%.
- Loan deals can be advanced through private credit funds or lenders offering customized financing solutions, focusing on your assets’ value, rather than solely relying on your credit score.
- Lenders apply significant discounts to protect against market volatility and potential declines in collateral value.
- Potential risks include market value fluctuations, margin calls, variable interest rates, loan defaults, market disruptions, and regulatory changes.
- Effective risk management involves borrowing judiciously and maintaining a clear repayment plan.
By smartly incorporating your investment portfolio into your real estate financing, you can secure faster, more flexible financing options compared to traditional mortgage lending – particularly in today’s market environment where private credit is increasingly shaping the real estate finance landscape.
In the process of real-estate investing, it's important to consider using your investment portfolio as collateral for better financing conditions. This can be achieved through a securities-based line of credit (SBLOC) or private credit lending, borrowing against a percentage of your portfolio's value. Worthy of note is that lenders apply significant discounts to protect against market volatility, and potential risks include market value fluctuations, margin calls, variable interest rates, loan defaults, market disruptions, and regulatory changes. To secure favorable terms, it's crucial to maintain a well-diversified portfolio and negotiate the terms of the deal prudently.
