So what are Lombard loans? Lombard loans are granted by private banks, and can represent a cheap and convenient way for your wealthier clients to access funds, when a mortgage may not be possible or advisable.
The security for the loan is an investment or portfolio held on the bank’s platform.
The minimum amount varies, according to the provider of the loan – but most private banks have a £250k minimum amount, and many have a minimum investment level of between £500k and £1m.
Interest rates can be quite different among the private banks.
Some private banks charge interest rates which are the same as property mortgages. This can be between 1.5% to 4% over LIBOR or BoE base, depending on the perceived risk of the loan.
But there are some private banks, whose capital is so strong, that they can afford to lend at rates as low as 0.50% above LIBOR on Lombard loans.
We’re dealing with some Far Eastern banks and some in the Middle East that are offering some clients rates as low as this if they bring in over £1m of investments and borrow against them.
Loan-to-value varies quite a bit. Most banks have automated systems to decide on the lending value of a certain investment, for example, if you were to borrow in GBP on GBP cash, there is no risk to the bank that it will go down in value, so the lending values are up to 95%.
Clients usually only do this for tax reasons. For a balanced portfolio of equities and fixed income securities like stock and bond funds, you can borrow between 70% and 80% of the value.
Then, if you were to hold a few stocks and want to borrow against that, it really depends on the historical volatility of the stock, how large and stable the company is, and the bank’s research and forecasts on the company, as to how much they’re willing to lend on it.
It can be down to 50% or even less. Some things, like exotic securities or AIM listed stocks, have a nil lending value because it’s too risky for the banks to lend on at all.
The loans are usually revolving, so, the client can draw down the loan, and repay, and draw back again, like an overdraft. The banks keep tabs on the value of the securities underneath it, so if it goes down in value, they will do a margin call and ask the client to repay some of it, or they lower the credit limit.
So, for a £200,000 Lombard loan, if you were paying say 1% above overnight LIBOR, the pay rate is 1.53%. That’s only £255 per month. So, if your underlying investments are doing better than this, then you could borrow against the investments, pay a rate less than what the investments are earning you, and then use that money do either invest in other things, like property or renovations for instance, or anything else you want to spend money on.
It’s a good thing to use if your investments are down and you expect them to rebound again, but you need liquidity – cash. Then you don’t need to crystallise your loss by cashing in the investments – you borrow against them and let it go up again.
Of course, there are lots of risks associated with Lombard loans. If the value of your client’s investments goes down, then they have a risk that they owe more than the value of the investments.
Banks would do a margin call before that usually happens, but things can move fast and it’s definitely a risk. So people must take professional investment advice before they take out a Lombard loan.
