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The Margin Loan: How to Make a $400,000 Impulse Purchase

So, I kind of just bought the house next door to me.

We’ve already gotten straight into the renovations with a symbolic first step: a new front door.

This is already somewhat amazing, for a small-town boy who refuses to even buy himself a new car.  But even stranger are the details that surround this deal:

  • I’m not moving into it.
  • I don’t really need or want a second house.
  • I have no long-term plans to be a landlord.
  • I made the decision on a whim, and the whole transaction only took about 45 minutes of actual work.
  • I paid “cash” for the house, avoiding the hassle of getting a mortgage – while not having to accumulate an entire house price worth of cash.

And most importantly to you, I used a financial trick that I only recently learned about, but upon further study is an incredibly useful thing to have at your disposal (as long as you use it responsibly).

The real story is this: 

About two months ago, I learned through the grapevine that the house next door would soon be on the market. There was a cryptic “for sale by owner” entry on Zillow with a $400k asking price, but no pictures and no information on how to contact the sellers. In response to the information vacuum, Zillow had just automatically sucked in a really ugly Google Street View picture of the house.

Figure 1: Just(in) listed

In my area, we are in the middle of an insane housing boom. Every new property that comes to market, no matter how modest, is treated like Justin Timberlake stepping onto the stage of a dazzling arena of adoring fans.

This has left several friends who arrived more recently searching fruitlessly and losing the inevitable bidding war for each uninspiring property, over and over again.

And my little street happens to tick a lot of boxes for our type of shoppers: a walkable and bikeable central location which also backs onto open space and features newer (1990s) houses with a layout that can easily be split into two units with separate entrances. All at lower prices than the older houses without views and without house-hacking potential, just up the hill. 

Figure 2: Actual scenes from my back yard(!)

So I knew this place was a good deal and a good investment, and sure enough several friends were interested. The only problem was, so was everybody else: a bidding war was already bubbling up and we only had a few days at most to lock it in. 

And my most interested friend was self-employed, and in the middle of a year-end business boom –  both factors that would delay her ability to get a mortgage. How could we secure this house, so she would get an amazing deal and I would get to live next to a really great group of friends (and continue my plan to gradually take over more of the street) rather than rolling the dice with a random set of new neighbors?

The solution: we made a deal where I would make an all-cash offer to buy the house, with very quick and friendly terms to the seller so we could beat the other offers. Then my friend would take her time to get a mortgage, and buy the place from me at a more leisurely pace – effectively just leasing it from me in the meantime.

The problem: I didn’t have anywhere near $400,000 sitting in my checking account, and I did not want to sell a bunch of shares and trigger capital gains taxes (which in my case would be at least $60,000), just for this short term project. I’m a good friend, but not that good.

The Ultimate Solution: Learning from a friend who has been doing this for years, I transferred some of my existing investments out of Etrade and into a new brokerage firm (Interactive Brokers), which has an unusually good Margin Loan capability.

This let me borrow money against my own shares, at an interest rate of about one percent (1%!), without selling any of them

So end result for me is like a very flexible mortgage, but at less than half the interest rate, and with a virtually-overnight origination speed. And I am the CEO of the bank!

Introducing the Margin Loan

Let’s start with an example of what I did, although with fictional rounded numbers just to make it simple.

The way a margin account can work, if you’re careful.

You may have already heard about the often-risky practice of “buying stocks on margin”, along with its notorious darkside, the possibility of a “margin call”. But there’s also a big potential advantage, which is why people do it. Let’s summarize both of them so we can see how to do it right.

In the best case, a margin account allows you to do things like this:

  • Put in $100,000 of your own money and buy, say, some shares of the VTI index fund.
  • Use that as collateral to borrow an additional $100,000 to buy more shares (VTI or otherwise).
  • You end up with $200,000 invested.
  • If the stock goes up by 10% per year ($10,000) and you are borrowing the money at only 2% (which costs you $2000), you get $8000 every year for “free”.

The downside is that this can happen:

  • You invest your $100k, borrow that second $100k, and buy the same $200k of shares.
  • COVID hits and your shares suddenly go down 50% (total value is now $100k)
  • BUT, that $100,000 margin loan you took out hasn’t changed. In other words, you still owe the brokerage $100k, and your account value is now only $100,000. The total value of your account is now zero.
  • Even worse, the brokerage is not cool with this situation, because they require a 50% “maintenance margin”.
  • They automatically sell half of your shares in order to reduce the loan balance to $50k.

You’ve just lost 100% of your money (because you own 50k of shares and owe the brokerage 50k), and you were forced to sell the shares at the worst possible time, shutting you out of the possibility of a rapid rebound (like we saw just after the 2020 Coronacrash).

Note: if the stock drops fast enough, you can even lose more than all your money.

So, margin is a powerful tool that can multiply your profits or your losses. However, since the stock market tends to rise over time, it can still be a valuable option, as long as you use it with great caution.

So why, and how, am I using a margin loan?

Although the basic idea (and risks) are the same, I am using my margin loan a bit differently, to withdraw cash instead of buying more shares. And I am keeping my borrowing well under that 50% threshold in the example above, in order to reduce the risk of trouble in the case of another market crash. Here is what I did:

I created a new account for myself at Interactive Brokers, selecting the “IBKR Pro” account type to get the lower margin rates, and set it up as a “margin” account versus the unnecessarily complex “portfolio margin” option.

I transferred a relatively large amount of shares of stable, diversified companies (mostly the VTI index fund and some Berkshire Hathaway) into this new account. 

With a securities transfer, your actual shares move between from your old brokerage to the new one, rather than being sold on one side and re-bought on the other. This avoids triggering unnecessary capital gains taxes. I was able to make this part happen entirely online – no phone calls required.

Then, since my account was new, I had to sit and wait for 30 days, to clear the security lockup period. This is a good reason to plan in advance by setting up an account when you aren’t rushing to buy a house. But the deal still worked out, and I’m even more prepared for next time.

After that I was able to withdraw cash using the margin loan feature. The brokerage lets me go all the way up to 50%, but I kept mine to a lower percentage.

Now, when I go to make a withdrawal from my account, I see a screen like this one:

Although I already have some money borrowed on margin (a negative cash balance), the system calculates how much extra I could still borrow based on the current value of my shares.
As I pay off this loan, the green number will grow and eventually the red number will rise above zero as well.

This money simply went immediately to my checking account. I used a wire transfer, which the brokerage did for free.

Within less than an hour of that money hitting my checking account, I was able to wire it right back out to the title company, and buy the house.

Technical note: In this case, I did already have a portion of the house price ($140k) available in cash. This allowed me to borrow a smaller amount ($260k) using the margin loan, which made it possible to stay within a conservative borrowing range without requiring millions of dollars in shares.

The Real Magic: Ludicrously Low Interest Rates

For a brokerage, a margin loan is an easy and automated way to safely make money off of their clients, because they are really just lending you a portion of your own money.

So as long as they set the rules conservatively, they have your shares as guaranteed collateral and can sell them instantly if needed. This means they can offer rates barely above the prime rate. And Interactive Brokers is particularly aggressive, offering the rates below at the time of writing.

(Interactive Broker Margin rates as of Jan 2021. Note: you can always check the current rates on their website here)

For comparison, Robinhood offers margin loans at 2.5% and Etrade is something silly like 7.95% and up as I write this. Even the low-fee standard Vanguard is in the 7% range. So, Interactive Brokers is truly unique for now – which is why I created my account.

Rates will Fluctuate:

For US customers, that “Benchmark Rate” in the table above is based on a multiple of the Federal Funds rate. As I type this, that rate is around 0.25%, and one year ago it was 1.25%.

Since it is adjusted during quarterly committee meetings, it rarely moves more than 0.25-0.5% during any given three month period. As example of rapid increase, from 2004-2006 it went up from from 1.25 to 5.25%. More history here.

Cool Implications of This New Trick

1: Staying fully invested without fear

In recent years, I have found myself disobeying my own advice and holding more cash in checking accounts than I should have. By foregoing the returns I would have earned if I left this money in the stock market, I have cost myself many thousands of dollars.

But I was holding back due to a range of fearful excuses like, “What if there’s a stock market crash and I want to get some shares on sale? What if my income tax bill is higher than expected? What if a house comes up on the market and I want to be able to spring on it quickly?”, and so on.

With the margin loan option now in place, all of these fears disappear. I can now safely remain fully invested, and in the unlikely event of one of those “emergencies” above, I can just pull out any amount of money I might desire. No delays, and no taxes.

2: Being able to buy houses on short notice (or even become a mortgage company for your friends)

In my situation, I was able to lock in a good deal on a house due to the power of the “cash offer”, which benefits my friend who will eventually buy it from me to become the final owner. After buying several properties with actual money rather than a mortgage, I have found that the benefits are huge:

  • By offering cash (and providing proof of funds as needed), you show the seller that you are serious, and that you can actually afford the house. In a hot market, many buyers make offers on houses that they can’t truly afford. Several weeks later, they find that the financing falls apart, leaving the seller hanging and needing to re-start the sale process. A cash buyer is thus much more reliable
  • Mortgage companies can be very slow, taking a wise but extensive list of steps before they hand over the money. It can be 6-8 weeks between offer and closing. With your cash, it happens at your own pace (it could be as fast as one day, but 3-4 weeks is reasonable if you are doing inspections and other due diligence.
  • With a cash offer, you can make your own decisions about how to handle the inspection, or even perform your own (if you happen to be qualified as I am). You also don’t need to pay an appraiser $600 to take a random dartboard guess at the value of the house you are choosing to pay. As an advanced buyer, you presumably know the value better than anyone else.
  • Finally, with cash you eliminate any loan origination fees and you can choose your own insurance coverage and deductible, since you are the only one at risk.

Although this arrangement is unconventional, it doesn’t feel too risky for me, because the house is solely in my name. If my friend changed her mind or otherwise could not complete the deal, I still own the house, which could be sold at a small profit or rented out. From a legal and accounting perspective, all I’ve done is bought a house as an investment.

For those with sufficient savings (and who are not prone to worry), this “Cash Buyer Vigilante” idea could become a valuable service for other friends, or even a sort of business: you help your clients to make cash offers to buy houses, which gets you a better deal in a competitive market, and you collect a fee for the service. You may also earn a small spread on the difference between the mortgage rate and your broker’s margin interest rate.

3: Avoiding unnecessary taxes

If you never have to sell your shares, you can keep those gains on paper instead of out in the real world – perhaps even for your entire lifetime.

As long as you’re comfortable with the margin loan interest rate (which will not always be as low as it is today but should in general remain cheaper than a mortgage), you can borrow against your growing pool of investments for everyday living expenses, house purchases, and even charitable contributions.

And if you borrow to make additional taxable investments (which is exactly what I have done for the house next door) , the interest itself may be tax deductible as well. For example, consider the following hack, just one of many:

You have millions of dollars of appreciated Apple and Tesla stock, and want to tax-efficiently fund a nice lifestyle forever. You could

  • Use a margin loan against these shares to buy a solid multi-unit apartment building (preferably with a high yield and a hands-off management company to manage it for you)
  • Collect the considerable rent, while taking any allowable depreciation deductions
  • With a good property, the surplus after all of these expenses will more than pay for your margin loan interest and your own pleasant lifestyle. Groceries, household expenses, kids, travel, whatever you like. And you still own your original investments and haven’t paid capital gains taxes on anything.

You do have to be careful, of course. My rule of thumb is to be more than prepared for the worst stock market decline that has ever happened, and even then have a backup plan beyond that. So, my primary house will never be at risk, and only a small portion of my total investments will be subject to margin borrowing. 

But if you do it right, I believe this trick allows you to trade a very small amount of risk for a rather large increase in life options and satisfaction – in other words, fun.

So I look forward to sharing more stories of how this neighborly arrangement works out, and the intriguing adventures I have with this new margin account after that.

In the comments: if you have more experience and/or questions about margin loans, please share them, and I will update this article so we can make it more comprehensive.

—–

A note on Interactive Brokers: I chose this firm based on advice from some friends who are established investors, followed by some online research. I am happy with the results so far, and I received great customer service when setting up the account and going through the learning process of the margin loan (which is really easy). But, like everything in life, I still view it as an experiment. I have lots left to learn.

The company has a nice “online-university” style explanations of all sorts of things, with nicely formatted pages and video lessons – including more advanced forms of trading that I don’t plan to get into. But in the case of the margin loan, I found this guide to be useful.

IB also offers a referral program. If you establish an account and like the results enough to recommend it, you can share it with your friends. As the program currently stands, you will get $200 for each new customer, and your friend will get up to $1000 (1% of the value of the assets they use to fund it) – payable in the form of IBKR shares, which is kind of a novel way to pay a bonus.

If you are thinking of signing up and need a referral link to get your own 1%, you are welcome to use mine here – which will of course benefit the MMM blog so thanks if you do!

  • GCC January 29, 2021, 11:01 am

    Investors who itemize their federal income taxes can deduct investment interest expense of margin loans against their net investment income. This may allow some of your readers to further lower the net cost of this approach (vs their alternatives).

    Reply
    • Wei February 15, 2021, 11:50 pm

      Say last year my margin loan interest cost is 10k and I profited 20k from the stock. Then, I could enjoy the 10k tax deduction?is it right?

      Reply
  • Tristan January 29, 2021, 11:08 am

    Why would you buy a house when you could buy GameStop?

    Neat trick! Thanks for sharing. Hopefully it becomes more useful to me when I transfer some of my equity of houses and into the market.

    Reply
  • Buck January 29, 2021, 11:15 am

    So I guess the only concern here (a big one though) is the baked in assumption/necessity for the market to always be going neutral or up?

    Downside risk seems concerning, no?

    Reply
    • John January 29, 2021, 3:10 pm

      Buck, MMM does consider the downside risk in his explanation. He points out that he is only using 25%-50% of the available margin balance. This cover the risk up to a 50% drop on the market.

      Reply
    • Bryan January 30, 2021, 11:45 am

      The solution to the risk of a margin call and having to sell when the market is low is to maintain an open line of credit (personal or HELOC) and use that to buy additional stock when the market depreciates and you’re close to having to post maintenance margin. The definition of buying low! I do this myself.

      Reply
      • Jason January 31, 2021, 3:45 pm

        In case anyone missed it, this is a description of a full circle money borrowing machine. Let’s get a guest article from this guy!

        Reply
        • Adam January 31, 2021, 9:23 pm

          Interesting! Can you explain more about how to do this?

          Reply
          • Bryan February 1, 2021, 11:26 am

            I applied for a $100k personal line of credit with First Republic and also obtained a $200k HELOC at BBVA Compass for the 70-80% LTV portion of my primary home. When my account value depreciates at IB, I transfer money into my checking account from one of the lines of credit, and the purchase additional stock by transferring the cash to IB. It takes a few days, so the important thing to track is how close your margin ratio is to the margin call and never let it get too close (10-20% safety cushion).

            Reply
            • swashbucklinstache February 5, 2021, 5:52 pm

              To be clear, part of the reason Interactive can offer such comparatively low interest rates is because they can call your margin in at any time without offering you a chance to execute this.

              Margin + HELOC is also a strategy to double down on borrowing.
              Each of these individually or together can be great or can be really, really bad depending on the timing. Note that the most likely time to get your margin called, see your margin collateral requirements change, or see interest rates go up is when the market is crashing. Plan accordingly.

              There are other things you can use to get even better deals that come with caveats like “you won’t use this borrowed money to (directly) invest in stock.” MMM mentioned portfolio margin / pledged asset lines in the post, and if these caveats don’t ruin your plans you they should be considered.
              —-

              To go a step further on the main post, this is hinted at above when MMM says “hold for the rest of your life” and you’ll note that he highlights Apple and Tesla, not mutual funds as is usually stated on the blog. The reason for that detail is that there is a not explicitly stated here but gigantic benefit at play, if you have the loads of money we’re talking about here. That, friends, is the step-up basis on death. In other words, if you have sufficient net worth, you can do this margin approach and never pay capital gains during your life, and then after you die your heirs get those individual holdings (NOT funds) but aren’t burdened by your cost basis. That is, they can sell immediately and pay zero capital gains tax regardless of what you would have paid had you sold. Remember that next time you think raising capital gains taxes is hurting the super rich – few people with a net worth of 25 million+ are paying them anyway. Republicans will tell you this is a big reason they vote to keep those taxes down.

              Overall, margin loans are definitely a tool for the tool box, but please be careful. If your situation isn’t like MMMs – multimillionaire, making $400,000 of passive income a year, buying a (relatively) stable asset with known near-term exit strategy, please at the very least, don’t go as fast as is described here, do more learning first.

              Using it for buying houses to resell can very much get you in legal water depending on how you do this, see a comment below alluding to this. Democrats will tell you this is a big reason they vote for the housing laws we do, lest the people with the money get unilateral ability to make the rules.

              A final note is that the person behind Interactive Brokers has a long public history. If you find yourself in a happy position of being able to safely weigh your morals against your profits, it is worth at least reading a few articles before making your own decision there.

              Reply
  • Profit Greenly January 29, 2021, 11:20 am

    Congrats on the house purchase. Are you going to put solar panels and a heat pump on it to make it net zero? Seems like a good way to profit.

    Reply
    • Profit Greenly January 29, 2021, 11:33 am

      Thinking about your article a bit more, why not finance the solar and heat pump with a margin loan? They will almost certainly return over 1% each year in terms of savings. This probably applies more to the house you’re living in now than the house you bought for your friend as there is a real risk that these items don’t resell well so I wouldn’t put them on her house, but I would council her to do so as soon as she buys it from you. If you’re going to live in the same place for a while and your utility rules don’t cripple their returns then it’s a no-brainer to invest in them.

      Reply
      • Troy January 29, 2021, 11:44 am

        That’s another great application! So long as interest rates don’t rise too much before your break even date, this just means you upgrade to solar and pay yourself back instead of the utility company.

        Reply
        • Brian March 1, 2021, 6:58 pm

          I would wait and see what The Green New Deal is going to give us.

          Reply
          • RobDiesel March 14, 2021, 4:52 pm

            Well, according to the smooth-brains in charge here in Texas, we got frozen windmills out of the Green New Deal. :D

            Personally I’d love to see solar panels and an electric car in my future, so any incentives there would be welcome.

            Reply
          • Diana Bailey March 22, 2021, 2:58 pm

            We have great incentives already and a solar company can give you info for your area. That said, I agree that a better deal is on its way.

            Reply
  • Drew C January 29, 2021, 11:34 am

    This is the kind of stuff I follow you for. This is an excellent tool.

    I wish I had read this before my parents refinanced their mortgage to get cash out for a kitchen remodel…

    Reply
    • carl January 29, 2021, 4:43 pm

      I know, right? What an amazing tool! We’ve had lines of credit against our homes, but this beats it completely. No appraisal fee and a much lower rate.

      I don’t think Pete mentioned it, but yet another benefit of this arrangement is that it doesn’t touch your credit score.

      I’m starting the transfer process to Interactive on Monday.

      Reply
      • April January 29, 2021, 11:02 pm

        Such a stupendously awesome money trick! Why did I believe that borrowing on margin was only meant to buy more stocks in a risky, leveraged way? Cool about the credit score being untouched as well… something to remember for the future.

        Reply
      • Cubert January 31, 2021, 7:54 am

        Were you not there to tell Pete that the new door goes in AFTER all the rehab work is done? ;-)

        Keep me posted on how your experiment goes, Carl. I’m about to pull the trigger too after reading this.

        Reply
        • Dicey February 5, 2021, 9:41 am

          Lol, as an experienced flipper, I immediately thought the same thing!

          Reply
          • Mr. Money Mustache February 5, 2021, 11:25 am

            Haha, clever point and I agree. This door happens to be on the upper level of the house, which doesn’t need much work. (Plus there’s a side door that has better access to the rear driveway which is where the trash and tools operate)

            The positive side of doing a new door right away is that a) It enhances your living experience immediately, and b) it makes your neighborhood a better place as well.

            It may even serve as a signal to the other homeowners nearby that “hey, this is a place where we are investing in and taking care of our properties, so you should feel reassured that it’s okay to do so too”

            Similarly, I think it’s good to plant your front gardens and some new trees immediately as well, so they will have time to grow during the years you own the house and may be working your way through the interior. Trees are like Nature’s form of passive income.

            Reply
      • Chris February 3, 2021, 4:25 am

        The credit score thing is a cool benefit. I had never heard of Interactive Brokers before so I’ll have to look them up but I think M1 Finance allows the the same setup.

        Reply
  • Min January 29, 2021, 11:34 am

    Interesting article! Very timely! I was just researching margin investing… but quickly decided that margin investing is always crazy and risky. Now I’m reevaluating.

    I’m wondering, do you have a take on margin investing as a long-term investing option, similar to a mortgage? In theory, do you think this could this be an example of good debt, if you assume interest rates as good as those offered at Investment Brokers? That call feature is terrifying, so I guess you would want to borrow very small sums in proportion to your overall investment.
    (This is really a theoretical question, as I think long-term margin investing – even if it were a good investment idea, which it may not be – would introduce a lot of stress.)

    Reply
  • Ryan January 29, 2021, 11:38 am

    Is there any type of margin buying or loans available through Betterment?

    Reply
    • Mr. Money Mustache January 29, 2021, 2:41 pm

      No, this is kind of the opposite of what Betterment investing is tuned towards. Margin loan investing is complex and risky. Betterment is meant to provide a warm, fuzzy automated solution that you don’t have to think about. I have money in both options, but in general I am comfortable with some complexity.

      Reply
      • Jan January 29, 2021, 7:00 pm

        Wealthfront supports it and calls it Portfolio Line of Credit or PLOC for short. The interest rate is higher than InteractiveBrokers, but a lot lower than Vanguard etc.

        Reply
      • Mr. Nomad January 30, 2021, 12:33 am

        I have a follow-up question about Betterment. Can you transfer share from a Betterment brokerage account to Interactive without having to see anything and occur taxable event? Thanks!

        Reply
        • TFH February 3, 2021, 2:05 am

          I’m also wanting to transfer funds from Betterment to IB. Do you know if this is possible? Initial research from both firms is unclear.

          Reply
          • Brian February 5, 2021, 2:13 pm

            Yes, you can transfer your shares “in-kind” so that you retain your equity positions and avoid taxation. I move my taxable account to IB from TD Ameritrade and it was very easy and straightforward.

            Reply
            • Gady March 11, 2021, 2:08 am

              I’m considering this move too (TD—>IBRK). We’re there fees associated with the move? How quickly could you get it done? Does your cost basis for stock purchases also get transferred? Thanks!

              Reply
  • Troy January 29, 2021, 11:42 am

    Couldn’t be better timing with a considerable amount of cash in the bank, waiting for real estate, this is a much better idea! It also gets around the mortgage income requirements which are necessary for a typical mortgage, so a great option for funding real estate investments for an early retiree.

    Reply
  • mary w January 29, 2021, 11:45 am

    How quickly can rates change? Probably doesn’t matter to you (MMM) since you’ll be selling it to your friend within months, but for other uses 1% turning to 7% in, for example, a year would be dangerous.

    Reply
    • Mr. Money Mustache January 29, 2021, 2:39 pm

      I believe the rates are based upon some multiple of either the federal funds rate, or the 10-year bond or similar (I will update this info in the article and feel free to chime in if anyone knows the answer already.)

      In this situation, they will go up as fast as the central bank raises interest rates, which is typically pretty slowly – 0-2% per year in past economic boom periods, typically once we reach really low unemployment rates and signs of greater-than-target consumer price inflation start showing up.

      Reply
      • LB January 29, 2021, 5:31 pm

        Thank you for posting these black belt moves for us to consider. Bravo.

        Seems like, to make sure your readers understand the downside… that you can reposition this excellent article/blog post by emphasizing (even more) that this is something that is TEMPORARILY / CURRENTLY a smart thing to do in today’s unusual environment, if: (1) if margin rates stay below x% at interactive brokers. (2) if your stocks/portfolio value doesn’t dip below x%. (3) if you only use x% of your available max margin loan, not 100%…

        Reply
      • Liran Brimer January 30, 2021, 8:29 am

        Depending on the currency you take loan at, each has a different Benchmark.
        for USD, its indeed the Fed rate
        https://ibkr.info/article/2949

        Reply
    • Eric B January 29, 2021, 10:21 pm

      I think the bigger concern is: how quickly can maintenance margin requirements change? (Because Interactive Brokers will supposedly automatically liquidate your holdings in the event of a margin call.)

      Searching the web, it looks like they raised requirements around the 2020 US election (I wouldn’t have expected that!) due to expected higher volatility.

      Honestly, this strategy seems risky because margin requirements will probably go up due to increased volatility exactly when your investments go down due to some calamity, and there’s nothing you can do to stop a margin call that locks in huge losses. I’d only be comfortable borrowing 10 – 15% of my portfolio’s value this way.

      Reply
      • Daniel Born January 30, 2021, 1:32 pm

        I’ve used IAB for like 10 years at this point, and I’m in and out of margin all the time to much higher amounts than 50%. If you’re not going above 50%, the margin requirements will never really affect you. MMM is also mostly in indexes which often don’t have their reqs change by much.

        Reply
        • Shelley Cooper April 19, 2021, 11:23 am

          Have they ever called the margin Daniel? At higher than 50% did they let it ride? I’m looking at using this feature to buy a property abroad that requires full cash. If this helps me avoid capital gains by not selling shares that’s a huge advantage. I’m curious about pay back strategies. Do you just pay back as quickly as you can? If funds raise in value are they basically paying it off for me? Thanks 🤩

          Reply
  • Mistress of Home and Finance January 29, 2021, 12:03 pm

    Congrats on the new house/project!
    I love that your blog always has unconventional but useful ideas for navigating finance.
    I’m curious to see how sustainable IBKR’s interest rate is, and if they’ll keep it so low in the future.

    Reply
  • Jack January 29, 2021, 12:17 pm

    Thanks for the great post MMM! This is definitely going in my financial back pocket. Would you recommend a smaller-scale version of this whole house purchase idea for, say, putting up a 20% down payment on a house to secure a mortgage in the first place? Would it make any sense for a pre-FI person house hunting to keep investing instead of saving up $60k-$120k in a high-yield savings and then take out a margin loan on that portfolio? That way the capital could stay invested.

    Essentially I’m wondering where you’d draw the line on having personal investments back loans for life expenses directly. You mention purchasing a rental property with such a loan and THAT paying for daily life expenses, but taking out loans to directly pay for daily coffees or groceries feels a bit less “intelligent” or savvy.

    Could this completely replace the FI strategy of hitting your number and instead of selling/taking dividends, you just take an annual or even monthly margin loan against your portfolio paying 1% interest?

    Food for thought! Cheers.

    Reply
    • Pontus Geborek January 30, 2021, 2:31 am

      Hi Jack, this can and is being done by people with sufficiently big portfolios, or people in the startup scene who have pre money companies with ludicrous evaluations. As long as you are aware of caveats such as the broker being able to increase the margin at their leasure, and the potential for rising interrest rates and borrow conservatively you should be fine.

      I can give you a personal example, during my 20s i always kept atleast 6 months of living expenses in cash in my bank account as a buffer. Now in my early 30s i have a couple of properties rented out and my IT-company is cashflowing, i have pretty much reduced my personal buffer to 1 month, the rest invested since i have both a good relationship with my bank and my brokerage, so i have 2x separate lines of potential credit if something goes wrong. One thing to bear in mind in terms of leverage, you have a much higher leverage potential in properties, in sweden where i live you can buy with 15-25% money down (1:4 or 1:6 leverage), whereas your stock portfolio offers you less leverage due to higher volatility and also a higher risk of the creditor cancelling your loan, where in Sweden banks are not allowed to cancel your house loans as long as you pay your mortgage.

      Reply
  • Julia REinvestor January 29, 2021, 12:20 pm

    That is super nice of you and exciting to know that GOOD neighbours will be moving in!

    The margin thing is pretty cool, but I’m even more impressed at how you used an all-cash offer to get the sale. I’m going to have to keep that one in mind!

    Reply
  • Keith January 29, 2021, 12:23 pm

    Hey MMM,

    I am really surprised to hear you write about this. I did this exact same thing in March of 2020 except with my personal home.

    I had a rather higher 30 year mortgage, and I took out a margin loan at 1% with the new lower COVID interest rates from my IB account to pay off the house.

    I replaced my expensive mortgage with a 1% interest margin loan. It wasn’t risky because I started reading your blog in 2014, so my stock accounts are now many fold higher than my home debt, but like you I didn’t want to sell them. This was a fantastic solution.

    Reply
    • carl February 6, 2021, 7:33 am

      I was thinking about doing the same thing, but worry about the variable nature of the rate over the long-term. Do you have a plan for what you’ll do in a couple of years if rates go up?

      Reply
    • Kyle February 9, 2021, 3:53 pm

      Seems rather risky over the long term. I mean if you have a viable plan to pay it all back if/when interest rates shoot back up, I guess it sounds ok. I’ll take my locked in 30 year 3% rate over a variable any day.

      Reply
  • Darcy January 29, 2021, 12:31 pm

    So I’m reading this right: if I happen to go the margin loan route with this company (and have enough funds for a certain amount) I can replace a conventional mortgage with this?

    The only potential snag I could see with this strategy all falls down to when you have to pay back this loan. How long does it last you for?

    Reply
    • Mr. Money Mustache January 29, 2021, 2:35 pm

      As long as the brokerage doesn’t change their terms, the margin loan is interest-only. The interest rate will vary, but in theory at least you can just let it ride as long as you maintain sufficient margin.

      You should however always have a plan for how you’d pay it back if the terms ever changed to something you weren’t happy with. Those options could include refinancing or selling the house or transferring money from another account.

      Reply
    • Moana January 30, 2021, 3:42 pm

      The interest rates for the margin loan aren’t fixed, though, right? It’s all based on the prime rate? IMO a 30 year FIXED 3% loan beats out a 1% loan that could shoot up to 5 or 10 percent in a few years.

      Reply
      • Charlie February 1, 2021, 2:45 am

        Yeah, but it sure beats the heck out of my own country’s variable rate loans at 8% currently.

        I just have to watch out for the fluctuations in the currency on converting from USD. No free lunches.

        Reply
      • Fuzz February 19, 2021, 11:34 am

        You’re missing the point. MMM isn’t trying to get a 30 year fixed loan, or screw around with an appraisal or bank financing. He wants it to access the cash to buy the house and so he can sell it to a buyer he already knows. He only wants to hold onto the house for a few months. So why the comparison to a 30 year fixed? Obviously, that’s better for lots of circumstances. This loan is better for this circumstance. Sometimes you use a hammer, sometimes a screwdriver.

        Reply
  • Eric Hughes January 29, 2021, 12:32 pm

    Fascinating! I learned a lot reading this, thanks MMM.

    One question: is this margin loan only available in brokerage accounts, or can retirement accounts be leveraged in the same way?

    Reply
    • Amy January 29, 2021, 1:21 pm

      This is my question too. Most all the money we have invested in the market is by way of 401ks and IRAs.
      We have used a HELOC to supplement a “cash” offer for rental property. The interest rate on that is not near as good as MMM is describing with a margin loan.

      Reply
      • Grant January 29, 2021, 2:11 pm

        Not sure about other brokerages, but I’ve been monitoring the offer at M1, where the rate is 2%. There they let you start borrowing on margin after you have $10k invested, and it has to be in a brokerage account. I’m in the same situation as you where most of my wealth is in retirement accounts. I suppose that’s for our own protection, but like MMM I feel comfortable enough with broad based index funds to borrow a relatively modest portion on margin against them. Hoping to hear from others that maybe it’s possible at other firms?

        Reply
      • Chuck February 3, 2021, 12:23 pm

        No. IRAs cannot be used as collateral. It’s a IRS regulation.

        Reply
    • nathan January 29, 2021, 1:47 pm

      Eric,

      It depends on the brokerage. In Canada with Questrade, I can leverage the value of my TFSA against my margin account. I don’t get those rates though…. :(

      Reply
      • Josh January 29, 2021, 3:37 pm

        @Eric,

        With Questrade can you borrow money from your Margin account as described here? Or just leverage the amounts in TFSA or RRSP to buy stuff within the Margin account?

        Thanks!

        Reply
      • Reade Barber January 30, 2021, 8:07 pm

        Yes I doubt we Canadians get anywhere close to these rates. I just checked my home equity LOC that is secured by my house – 2.65%. I’ve never used it but why wouldn’t you use this account instead, you’d be saving almost 1.5%.

        Reply
        • Chris February 5, 2021, 12:46 pm

          I checked the Canadian website (.ca) for IBKR and their rates are pretty tempting… 1.6 – 2.5% depending on whether you subscribe to the Pro account or not. I’m assuming you can only leverage your non-registered account and not your TFSA and RRSP. I’m thinking of moving my non-registered holdings to experiment with it before I move everything over from CIBC Investor Edge. They transaction fees are much lower than the $6.95 I currently pay per transaction.

          Reply
        • Ryan Mihelich March 24, 2021, 8:27 am

          I agree completely on the HELOC. The last thing I did before I left my job in 2018 was take out a huge HELOC on my paid off home. We keep the balance at zero, but we’re able to react quickly and make cash offers on investment properties and have a huge financial cushion should we need it. We can then move money from investments to pay it off, perhaps with better timing for taxes if desired. Rates are variable, but have been just recently moved above 3%.

          Reply
    • jkbrennan77 January 29, 2021, 3:45 pm

      Don’t know about in Canada but in the US you definitely can not borrow against your IRA, that’s a “prohibited transaction” which is very bad – it forces all of your IRA to be considered distributed and subject to taxes and penalties:
      https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions

      Some brokers support “limited margin in IRAs” which allows you to trade with unsettled funds and make some options trades but has many rules around it to make sure that you are not borrowing money.

      Reply
    • Tex Johnson January 30, 2021, 6:18 am

      401K and IRA accounts are generally not eligible for margin loans (only taxable accounts). Note also that the amount of margin available depends on the securities you have in your investment account: stable funds and securities (like VTI) are generally available for 50-75% margin, but leveraged fund investments like TQQQ can’t be used for any margin. Margin loans make sense for stable securities, but if you have a security that has a lot of price volatility, don’t be surprised if a margin call happens.

      Reply
    • Ryan Tauka January 30, 2021, 7:50 am

      I’d love to know this too. MMM, does a margin loan with IB work with qualified funds (IRA, Roth IRA)?

      Reply
    • Malcolm Phoenix January 30, 2021, 10:03 am

      Retirement accounts cannot be margin accounts, per the IRS. That includes traditional and Roth IRAs, for example. It’s because you’re not allowed to use retirements assets as collateral for loans. See https://www.fool.com/knowledge-center/can-you-trade-on-margin-in-an-ira.aspx for a very readable explanation.

      Exception: Some broker let you use a limited form of margin — called “limited margin”, duh! — while settling trades in such accounts. However, that doesn’t apply to MMM’s more general use of margin.

      Reply
    • Moana January 30, 2021, 3:44 pm

      As far as I know, there’s a $50k cap on regular 401k loans. The exception is that there are some companies that let you do “self-directed IRAs” where you can get a mortgage using your own IRA funds, but I haven’t looked into them much.

      Reply
  • Kim January 29, 2021, 12:33 pm

    Does Betterment do margin loans or did you transfer your betterment egg to interactive brokers?

    Reply
  • Robert January 29, 2021, 12:34 pm

    It’s nice to see an article on property using a portfolio line of credit.

    This has long been a tool of the wealthy to leverage 20-30% of their portfolio for ultra-low borrowing costs for other productive investments.

    Reply
  • Tamas January 29, 2021, 12:34 pm

    This sounds too good to be true. How can not everyone use this instead of getting a loan from the bank?

    Reply
    • Mr. Money Mustache January 29, 2021, 2:33 pm

      The key is that you need to have a fair amount of money to begin with – which already makes it a bit of a niche product.

      Aside from that, the reason I wrote this article is that a surprising number of people (including myself, a 46-year-old who has been investing since age nineteen and writing a financial blog since 2011, and many of my similar friends), have never really realized that margin loans were this useful.

      Reply
      • Jeff January 29, 2021, 3:31 pm

        Thanks for sharing, MMM!

        I recently discovered IBKR margin loans too and opened an account a few weeks ago. I couldn’t believe the interest rates for margin loans.

        I plan to only use a margin loan up to 20% for emergency funds and real estate projects. It allows me to stay invested in VTI.

        Reply
        • Jeff January 29, 2021, 3:35 pm

          One other thing worth mentioning is that if your account is over $110k, you can have a portfolio margin. This allows you even more leverage, although I wouldn’t! I’m still sticking to 20% (Ex: $20k on a $100k portfolio).

          This helps me sleep better at night knowing my VTI portfolio can take an even larger dip before requiring a margin call.

          Reply
      • Charlie February 1, 2021, 2:46 am

        But it is asset-based lending, which is a real life saver for those of us without regular income to apply for mortgages!

        Reply
      • Fuzz February 19, 2021, 11:38 am

        As you point out, most margin loans aren’t this useful. Either you are required to use the loan to buy stock at the brokerage, or the rates are high. It’s really compelling because of IKBR allowing you to ACH the money and the low rate. That’s kinda new-ish in the scheme of things.

        Reply
    • Dylan Harris January 30, 2021, 9:04 am

      Another catch is that the rate is variable, which means at any time the rate could change and you’d owe more interest each month. Also it seems like the 1% rate by Iteractive Brokers makes this a unique opportunity. But the way you pay back this loan is also much simpler and easier than a normal mortgage, so as MMM said it’s mostly limited to you having lots of money in an investment account.

      Reply
  • Stephen January 29, 2021, 12:36 pm

    Brilliant strategy Stache, especially while IBKR has margin rates this low. I’ve always been a little concerned that I have too much invested and not enough cash on hand in case an opportunity presents itself. I might need to use this stragey myself. Thanks!

    Reply
  • Dean January 29, 2021, 12:47 pm

    I’m a full time real estate investor and have been using the IB margin account for year, in addition to HELOCS. Last March as the market spiraled out of control and I was getting very close to a margin call I had to decide weather to sell shares or borrow from a HELOC to fund the margin account. Given the uncertainty of the world, borrowing more money didn’t seem like the safest thing to do, so I sold shares 15% above where the market bottomed out. Now those shares have gone up another 50%, and of course I’m kicking myself for not buying back into this irrational market quickly enough. The good news is, the underlying real estate deals the margin account funded did incredible. As most things financial, decisions are based on either fear or greed! Thanks for the well written post on this very useful financial tool… it took me a lot of research to figure this all out a number of years ago.

    Reply
  • Andy January 29, 2021, 12:50 pm

    You alluded to it by mentioning Prime Rate, but one thing to keep in mind is that a margin loan has a variable rate, so if interest rates were to rise your interest rate would rise with them. I don’t think most people are expecting that, but it’s worth noting for completeness. A traditional mortgage allows you to fix your rate.

    Reply
    • Mr. Money Mustache January 29, 2021, 2:30 pm

      Yes! I will update the article to emphasize this further. Over time, these rates are likely to rise, simply because we are starting out at rock bottom. Never make a financial plan that requires your interest rate to remain steady, in order for it to work. Be ready for a doubling, or quadrupling someday or more, and also know what you’ll do if you want to later sell any particular assets that you own.

      Reply
      • Alex January 30, 2021, 3:08 am

        Highlighting this would help tremendously. I was actually wondering if the margin loan was fixed or not. It would have been too good to be true :)

        Reply
  • Edith January 29, 2021, 1:02 pm

    You are a good friend to have! A couple of years ago, I also bought the house next door and later sold it to family, I get terrified when someone new moves in to my street… I hate having bad neighbors, they can seriously make your life worse. Two other houses on sale on my street that year went to family members. During the pandemic, having everyone close by has been excellent for my 2-year old’s mental health, and a somewhat decent substitute for school socialization (his 3-year old cousin keeps him company, as well as other kids from the block). My husband and I have this fantasy of buying every house on the street and then selling them to people we love or like.

    Reply
  • Nicole January 29, 2021, 1:03 pm

    I was a broker at ETrade and customers opened margin accounts often- typically attached to real investing. It’s slick but there are risks involved. The rich tend to get richer in these situations with leverage…but such is life. I’m glad you are using it for good!

    Reply
  • Gurjeet Singh January 29, 2021, 1:04 pm

    I wonder what is a good amount to with raw from the margin account without getting burned from a Black Swan event.

    Jason DeBolt with $10M Tesla came up with 8%:

    “Must withstand an 80% reduction in $TSLA without triggering a margin call. If maintenance requirement is 60%, and you can borrow a max of 40% of you equity, then (1-0.80)*(1-0.60) = 8% max borrowing against equity. Borrow $80k for every 1 million in $TSLA. Not financial advice”

    Reply
    • Mr. Money Mustache January 29, 2021, 2:28 pm

      Yes, if you are pulling out margin loans against a champagne-bubbles valuation stock like Tesla, I would be even more conservative. If you chopped that company’s value by 90%, it would still be one of the world’s most valuable automakers, and you would only be back to where the share price was about 11 months ago. I’m a big Tesla fan myself, but I still know these bubbles do sometimes pop, because I’ve lived through them before in the year 2000 as a Cisco employee.

      In the article, I specifically mentioned that my own collateral is VTI and BRK.B shares, which are thousands of old, profitable companies that have relatively boring and stable stock prices.

      Reply
  • Ravi Ubriani January 29, 2021, 1:06 pm

    I looked into doing something similar a few years ago and the differential was the same then. Almost 6 percentage points difference between Vanguard and IB back then as well. Amazing that this hasn’t narrowed at all.

    Reply
  • caryatis January 29, 2021, 1:08 pm

    I hope this post puts an end to the idea that Mustachianism is anti-debt. I often hear the line “Your Debt Is An Emergency!!!!” quoted on the forums—but that line was originally about high-interest consumer debt. Credit card debt at 25%? Is an emergency, pay it off ASAP!

    Margin loan at 1.59%? Not an emergency.
    Mortgage debt at 2%? Not an emergency.
    Student loan debt at 3%? Not an emergency.

    Run the numbers, consult your own personal risk preference, and understand that wise use of debt will only make you richer. Personally, I’m paying off my student loans on a 10-year plan, when I could be debt-free in 5 years. But I’ll be better off with some debt and substantial assets than with no debt and no assets.

    Reply
  • Tim January 29, 2021, 1:15 pm

    What’s a shame is that Interactive Brokers has such awful documentation that I’ve failed to ever find this feature despite it being the reason that I signed up for the platform 6+ months ago.

    Last night, as my IBKR holdings had grown to a surprisingly high value (you can guess why), I spent over an hour trying to Google search and click around the IBKR Lite interface trying to find this feature. Frustrated, I ended up signing up for their debit card, which offers essentially the same margin load rates (I think?)

    Better documentation and marketing would go a long way, though in today’s climate I’m not sure if that is always a good thing. You’ve now casually written the best guide on the internet about this feature, god knows how many years after the product was launched

    Reply
    • Mr. Money Mustache January 29, 2021, 2:24 pm

      I agree that their interface is confusing in some places. Then again, I found Etrade was even worse. I suppose a fully featured brokerage account is inherently complicated, because it allows you to do a lot of exotic stuff (the majority of which I will never do).

      And the interesting thing about margin is that it’s hidden in plain sight: it just automatically integrates right into the “withdraw funds” feature, as you can see from the screenshot I included in this article.

      Reply
  • Conor January 29, 2021, 1:29 pm

    Very interesting!
    Are there reasons to do this or not do this to pay off a mortgage on your primary residence? If I were to pay off my mortgage this way, wouldn’t I only be risking the shares I’m borrowing against? or am I missing something. I wouldn’t want to risk my primary residence, but risking shares that I would need to sell to pay the mortgage off seems to make sense. (granted the risk is needing to sell shares that exceed the existing mortgage balance currently due, correct?)
    Thanks for your perspective!

    Reply
    • Mr. Money Mustache January 29, 2021, 2:21 pm

      Hey Conor,

      Yes – if I understand your question correctly, you would only be risking the amount of shares used as collateral on your mortgage payoff amount. And if you do it VERY conservatively, such that a 50% stock market decline would still not leave you subject to a margin call, the risk would be fairly low (based on historical standards anyway).

      As with anything, keeping a big safety margin with multiple backup plans generally keeps you out of trouble.

      Reply
      • Conor February 2, 2021, 3:12 pm

        Thanks for the additional feedback! And good luck with the experiment!

        Reply
    • Chris January 31, 2021, 2:34 pm

      Consider the advantages of a long-term, fixed-rate mortgage at the super-low interest rates that are offered now. At some point in the next few years, that 1% margin loan rate could easily increase above the 2.5 to 3% (fixed!) mortgage rates currently available now through a refinance.

      Also, I am not a lawyer or an accountant, but if you itemize deductions, there may be some tax benefit to having home mortgage interest as one of your expenses.

      Reply
      • Conor February 2, 2021, 3:22 pm

        Thanks Chris! Yes, on re-reading this post a few times, I understand better that the Margin rate can/will vary. I appreciate you calling my attention to it. I’ve been content with my 15-year fixed at 3.125% and tempted by lower fixed rates, but they aren’t that much lower so I haven’t refinanced recently. I vacillate between paying off the house vs making the money work harder! :)

        Still lots of research to do before making any big decisions! Thanks everyone!

        Reply
  • Nick B January 29, 2021, 1:30 pm

    Does anyone know if there is a comparable program in Canada which you could use your Registered accounts as the collateral? I’m building a home and cannot use leverage (LOC, etc) due to the setup of the property. I want to fund a portion of the build cost, $50k without having to sell any of my RRSP’s, etc. I need to do some more research but if anyone has any info, it would be appreciated. Thanks

    Reply
    • TheSteve January 29, 2021, 8:54 pm

      Hi Nick,

      I don’t believe margin is allowed in a registered account in Canada. You can however take up to 35k out of an RRSP using the Home Buyers Plan without tax to buy or build a home (see CRA regs for more info). However, this might not be helpful if you don’t have cash in your RRSP or a security you would be willing to sell. Another option that you might consider is that if you have a pension there are sometimes provisions within a pension plan that allow you to make a request to withdraw funds (at least in BC), but you would have to look into the details of that with your own specific plan (and note it may not always be a good idea).

      TS

      Reply
  • JoeHx January 29, 2021, 1:44 pm

    Interesting.

    I just did a quick internet search for “robinhood margin loan” (since I have a Robinhood account – albeit with not much in it) and their articles seem to imply margin loans are only buying stocks (or other securities) and not for other reasons someone might need a loan.

    Your use to use it basically as a super-low interest mortgage is pretty awesome!

    Reply
    • Cole January 29, 2021, 2:18 pm

      This is technically true, but it’s a rule that’s been overlooked by regulators for decades now. Different shops have different approaches to the use of funds raised through securities-based margin lending. Even within the different financial firms, generally they are more willing to accommodate this activity the wealthier you are.

      Reply
    • Alex January 30, 2021, 3:16 am

      Yes it can be viewed as a super-low interest mortgage loan but it’s still a variable rate one. Those numbers will most likely increase in the future.
      If that was a fixed rate it would have been too good to be true!

      Reply
  • Robert M. January 29, 2021, 1:47 pm

    Hi – thanks for posting this. Margin loans are how i’ve built my tiny real estate empire over the last 40 years. I started as a teenager, both equity investing, and owning real estate. Even in the late 1980s (i’m old!), they were incredibly favorable loans, and if you kept your stock portfolio in relatively non-volatile equities – or [clutch your pearls] BONDS – the chance of margin calls are/were minuscule. I exited the conventional workforce in my 30s and haven’t looked back, except to wonder why more people don’t strike out on their own (actually – we kinda know, right?). I now have 5mm worth of real estate; I am very careful to keep returns relatively LOW – 5%-7% after expenses; and keep good tenants; continuously upgrading properties & etc. All because of the differential between what rapacious banks [ie regular banks] will lend; and the rate that brokerage companies lend at (they are JUST AS rapacious, except where they try to wrest their money from is NOT via interest).

    As an aside, Vanguard margin rates are high, because as they told me when i asked them to match IKBR, they try to discourage margin.

    I was a little skeptical about IKBR, because it seemed too good to be true [i had been using a different discount broker for 3 decades), and i happened to call the controlling agency in the first week of the Trump administration. The only person left to answer my phone was the outgoing head of the agency! [whose name was often in the news, but as it was 4 years ago, i forget his name]. And he gave me a seminar in how brokerage accounts were insured, and that there was no chance of IKBR folding up (despite the Pres of IKBRs excellent ties…to me, always a symbol of decadent financial behavior).
    \
    Margin loans for all mustachians!

    Reply
    • Ben January 30, 2021, 7:33 am

      Hi, Robert. This margin loan concept is completely new yet very interesting to me as even here in Northeast Ohio, real estate is selling at a rather quick pace and cash offers seem to be coming up more often. If I want to use this concept to buy a property with cash, but I don’t want to have a margin loan hanging out there indefinitely, my option would be to take out a mortgage and pay off the margin loan, but I’d still have to pay loan origination and other bank mortgage fees to secure that mortgage? The mortgage would be for the amount required to pay back the margin loan. I’m understanding the margin loan concept better after reading this post and a few others online, but I’m still not clear on how you take out a mortgage for something you technically own already. Thanks for any clarification you can provide! Ben – Ecuador 2016 Chautauqua Alum

      Reply
      • RobRdam February 1, 2021, 2:03 pm

        Hello Ben, a mortgage is a loan like any other loan. Only this loan is secured with some real estate. Usually people need a mortgage when they are buying a home or refinancing, which makes it a complicated transaction. If you allready own the home nothing could be simpler: after you sign the security (giving the bank the right to sell your home if you don’t pay the mortgage) the loan is transferred to your bank account.

        Reply
    • Dicey February 5, 2021, 9:58 am

      Hey Robert M! I like the way you think. Are you familiar with the MMM Forum? There, you’ll find plenty of kindred spirits and a much more interactive format. I would love to hear more of your story.

      Reply
  • Joe Ansible January 29, 2021, 1:56 pm

    Thanks for sharing Tripple M! This advice could not be more timely. Over the last few I’ve been thinking of doing a cash out refinance to invest more in the market, and even though the long term math encourages me to do it, I just hate paying fees as part of the transaction. But now you’ve shed light on another approach. Basically doing the inverse! Cash out on stock equities to pay for the remaining mortgage. With a mortgage at 4%, the margin loan is most definitely cheaper. Plus I can cash in on that sweet sign up bonus, and finally cancel my home insurance! It’s as if I’m the one charging the fees now :)

    Reply
  • Gene January 29, 2021, 1:56 pm

    This post is too cool for words! Another classic IMHO. I have just been reading about Interactive Brokers and will likely set up an account with them. My current broker doesn’t execute trades fast enough. If I do, I’ll be certain to use the referal link as long as I can set up the type of accout that I want.

    Reply
  • Mike January 29, 2021, 1:59 pm

    25% is probably a good upper limit as long as you are invested in a conservative mix of large caps and bonds — and use the money in something uncorrelated with the stock market. In a market downturn IB do change the margin requirements and many smallcap stocks become unmarginable. Just when you need the margin they change the margin requirements. I would be more comfortable with borrowing 10%, and I generally just use margin on a temporary basis when shifting money around, or to fund purchases when I know other bonds will be maturing. I guess it can also be a bad habit to get into if you aren’t very disciplined. Caution required, it’s not like a mortgage. You can’t go into negative equity.

    Reply
  • Willard January 29, 2021, 2:06 pm

    I read a book in 2020 called “The Value of Debt” by Thomas Anderson. He advocates households utilize margin accounts and interest only HELOCs as a part of a debt strategy. He recommended having a debt ratio of about 25%, with the intention of safely optimizing leveraged investments for greater profit (as opposed to zealously striving to be debt free or being over leveraged). His overall thought was that a household should operate more like a business, and that businesses typically use some type of non-amoritized funding sources, like bonds or stock issuance. Households generally do the opposite – they enter a “monthly payment lifestyle” instead of a balloon payment/interest only/lump sum mindset.

    Pertaining to margin loans – it seemed vanguard’s rate didn’t lend itself for much opportunity to arbitrage for profit, so I filed the concept away as interesting, but not applicable practically. The company you found opens that world back up.

    Reply
  • Sean January 29, 2021, 2:11 pm

    Literally never thought I would read the following sentence from MMM: “I was holding back due to a range of fearful excuses like, ‘What if there’s a stock market crash and I want to get some shares on sale?'”

    He has $ emotions just like the rest of us!

    Reply
  • Cole January 29, 2021, 2:14 pm

    I work at a large private wealth management company and this is one of the most valuable tools for the ultra-wealthy. They can buy homes with all-cash offers using margin loans at FF+<1%, then get a mortgage after close to put the funds back. It's a dangerous game to plan to use margin long-term, as it's a slippery slope and introduces significant interest rate exposure that many often overlook. The scenario where you get wiped due to leverage is a real one.
    It happens all the time to folks who think markets only go up. You don't need another GFC to lose 40% when you're 2x levered (borrow 50% of your portfolio) and 100% equity. It just takes a down 20% market, which happens all the time. It takes years to recover from that kind of unnecessary loss.
    It's like eating junk food – just because donuts are on sale doesn't mean you should start eating donuts regularly. But eaten sparingly they can be a treat.

    Reply
    • Steve Crane January 30, 2021, 6:07 am

      I can’t emphasize this enough. Cole is exactly right.

      MMM is using margin as a low leverage bridge loan on a project with a high probability of wrapping up quickly. That makes more sense than a mortgage due to the speed and lack of up front fees. I only post this as a caution about using margin debt as a long term strategy. Investing without margin is risky enough for most people.

      Margin loans are ALWAYS floating rate, and I’d imagine most Mustachians have built their stache on the back of falling interest rates. The current situation of massive deficit spending financed by money printing just needs a catalyst for asset inflation to shift to goods and services inflation. That catalyst could be a successful vaccine rollout.

      While I have confidence that reflation will be contained, there is a non-zero probability that it won’t be. In that scenario, we will witness the mother of all tightening cycles, asset deflation of all types (including “safe stocks” like index ETFs and BRK/B and even residential real estate), and your monthly nut on your margin loan will increase by multiples.

      It is at this point that you want to invest more in the market, but you won’t be able to. You might even (gulp) feel compelled to have to work on somebody else’s terms.

      In other words, don’t be greedy with margin debt by using it as permanent investment capital.

      I would suggest a low rate, interest only fixed rate mortgage for that purpose. The bank isn’t going to call your house away if it goes down in value if you continue to make payments, your payments won’t go up, and your portfolio should have plenty of time to recover in the event of an interim market collapse scenario.

      If you can’t afford to pay an extra 2% for the safety of locking in all time low fixed rates, you should probably rethink FIRE.

      Check out Schwab if you have an account there. They offer rate discounts on mortgages. The discounts grow with your combined brokerage account balances, including IRA’s.

      Sleep well.

      Reply
      • Mr. Money Mustache January 30, 2021, 9:48 am

        Great advice Steve – I especially like your point about inflation and rising interest rates and decreasing stock prices all happening at the same time. Margin loans work best for fairly short term purchases, OR when used very conservatively as a percentage of your portfolio so that they won’t have a material effect on your overall investment life if something changes drastically.

        Reply
        • Steve Crane January 30, 2021, 2:06 pm

          Thanks! You can also use margin to pounce quickly on a long term investment opportunity provided you then get right to work to secure more permanent investment capital. And it doesn’t have to be a mortgage. It could be as simple as buying a couple of months before a short term capital gain becomes a long term gain. The potential tax savings can mitigate the risk of price decline. You could even use the margin loan to buy a put option to hedge against a price decline while you wait for long term gains treatment. A lot of people are sitting on tremendous and unprecedented single security short term gains at the moment.

          Reply
  • Mark Thomas January 29, 2021, 2:15 pm

    Interactive Brokers is the best broker in business. Have to get used to UI, but quite powerful and allows you to trade globally for low cost. Also have the best balance sheet in industry so you don’t have to worry about broker liquidity like Robinhood this week.

    Reply
  • 5Inatrailer January 29, 2021, 2:58 pm

    Dude, it still blows my mind 10 years on how our life experiences are so similar (you replaced a patio door when I had to do mine. I replaced Honda Odyssey axles when you did yours etc.)

    My neighbor 2 doors down went to hosp via ambulance 2 weeks ago (who knows why) and I was thinking of buying his house as an investment/ rental. It has the same features: central location, huge yard, backs onto green park (with city outdoor pool! That I don’t have to maintain).

    Your solution to financing this could be a fantastic strategy- well done! Basically like a HELOC except from your stock portfolio. Brilliant! As most people here contemplate the opposite (mortgage the house to finance a stock portfolio)

    Bravo buddy.

    Reply
    • Ryan Tauka January 30, 2021, 7:54 am

      This is exactly how I interpreted it – Margin Loan: portfolio, HELOC:property. They both create great ways to bypass the banks and empower us in creative investing opportunities.

      Another great article, MMM!

      Reply
  • PJH January 29, 2021, 3:02 pm

    “Avoiding unnecessary taxes”

    Any thoughts/workarounds for tax regimes where there would be extra taxes?

    I think, specifically, of the UK’s current implementation of their highly valued(!) Stamp Duty Land Tax (SDLT) which is a marginal percentage of the value of the property bought (i.e. purchaser pays, of: <£500,000 is, 0%, 5% on the next £450,000, and it goes up,) upon which a further 3% is applied (from £0) if it's not your only property?

    With your scheme, and this tax regime, you'd be required to pay the +3% on the whole price (since it's a 2nd+ property for you,) but your friend wouldn't (presuming it'd be her only one.)

    Reply
    • Christof January 30, 2021, 7:39 am

      In Germany for a long time you would be using businesses for this. So, get the money required to buy, but put it into a new business. Then have the business buy the house. Later sell the business instead of the house. There are extra costs involved, so you need to do the math.

      Reply
  • Tim January 29, 2021, 3:06 pm

    I’m using this myself as well.
    Pro tip: you can lower your interest rate even further, to about 0.5% currently, by doing a “box spread” using SPX options: by buying and selling the right options contracts you can earn $x now, with the guarantee of losing slightly more than $x at a later date, thereby effectively borrowing money from an options marker maker. This also works with the more expensive brokerages.

    Reply
  • jkbrennan77 January 29, 2021, 3:36 pm

    I’ve never used IBKR but they do have great rates. Other brokers e.g., Schwab/Fidelity will often meet those rates or at least come close to them if you’re going to bring in assets to them. Let them know that you are comparing to IBKR and that you are bringing in a large amount of assets. I recently did the same basic thing but with Schwab and received a similar rate as yours. Schwab (technically Schwab Bank) also offers a Pledged Asset Loan which operates in a similar fashion in that you use securities as collateral. With the PAL you can borrow a higher percentage than with a margin loan, but you can’t use the borrowed funds to buy additional securities. Of course, to your point above, you should ensure that you do not borrow so much that you could be subject to a margin call during a market crash. I used to work for a discount broker and had to explain to clients last March that we had sold all their securities but the market had dropped fast enough that the value of their securities when we sold them was not enough to cover their margin loans so they had nothing in the account and still owed us money.

    Reply
  • Darren January 29, 2021, 3:49 pm

    Thank you! Very timely as I’m buying a house next week with a margin loan from Vanguard (bought in cash and got a better deal) then going was to take out a HELOC. Glad I saw this. I just opened an account with Interactive with your referral and starting the transfer of my VTI to take out a margin and payoff Vanguard’s margin and forget the HELOC for good!

    Very useful.

    Reply
  • JEM January 29, 2021, 4:46 pm

    “How could we secure this house, so she would get an amazing deal and I would get to live next to a really great group of friends (and continue my plan to gradually take over more of the street) rather than rolling the dice with a random set of new neighbors?”

    Observation: In other, unscrupulous hands, this entirely legal margin loan tip could be used by wealthy individuals to circumvent the Fair Housing Act of 1968 by ensuring a cherry-picked neighborhood. After the last four years I am a little cynical…

    Reply
    • Catprog March 19, 2021, 9:01 pm

      What is stopping the wealthy individual form purchasing the house outright without the loan?

      Reply
  • MI192 January 29, 2021, 5:44 pm

    MMM, this is a great post. I also recently discovered IB and I am using margin loans as well. I do think that your graphic in the post isn’t entirely accurate. Based on the IB website the Reg T maintenance margin loan requirement is actually 25% of your own funds + the borrowed funds. For example, if you have $100k in VTSAX, you can borrow up to $100k of funds. So your Reg T maintenance margin is 25% of $200k which is $50k. The Reg T initial margin works the same way: if you have $100k in VTSAX, you can borrow up to $100k of funds. So your Reg T initial margin is 50% of $200k which is $100k. So in effect, you can borrow up to 100% of your funds. I’m using the IB margin loan for a Dividend Carry Trade that has been really great. Here is the explanation: I borrow a margin loan (let’s say $100k). I use the funds to purchase a safe high yielding dividend stock that has a yield of 10% which pays monthly. So I pay IB 1% for the margin interest ($83.33/mo or $1,000/yr), collect 10% from the dividend stock ($833.33/mo or $10,000/yr) and I pocket 9% ($750/mo or $9.000/yr). This happens each and every month. It is like manufacturing cash flow out of thin air. Of course IB could raise it’s margin interest rates and of course the dividend stock could go down or stop paying dividends. But there are several stocks out there that have price stability and a long-term consistent paying dividend. I’m going to ride this Dividend Carry Trade for as long as possible.

    Reply
    • Mr. Money Mustache February 4, 2021, 4:46 pm

      Hey MI, I believe what you describe above is correct, but it’s different if you are withdrawing the money from your Interactive account as I did.

      In your example, you are using the loan to buy more funds, which serve as additional collateral so you can borrow more.

      In my example, I am pulling the money out so my current stocks are the only collateral they have.

      Regarding the dividend carry trade: I agree, this is a good move and is not particularly risky on average. In fact it’s a similar but much easier version of the “apartment building carry trade” that I described in the article. So, nice move!

      Reply
      • Trey February 15, 2021, 2:53 pm

        Are these dividends “payment in lieu of dividends” and therefore taxed at ordinary income rates?

        Reply
    • Jordan February 21, 2021, 8:44 pm

      Hi MI192, care to share which high yield monthly dividend stock you like? Thanks

      Reply
  • Link January 29, 2021, 6:00 pm

    I had looked into the “Infinite Banking Concept” as a way of opting out of the traditional banking system (where you pay much higher rates to borrow than you receive for saving) by building high cash value in a whole life insurance policy and borrowing against *that* instead, but was totally put off by the low rates of return. Yes, they have guaranteed return rates, but it would’ve taken me 17 years to have the cash value break even with the amount of cash I’d put in.

    This seems like it could accomplish a similar goal, taking out very low interest rate loans backed by your own assets if you need to finance an unexpected expense or opportunity, while the underlying asset continues growing as though you hadn’t taken the loan.

    The BIG difference is the volatility risk (no guaranteed rate at all, and could lose money), but all that means is that I should adjust the scale at which I operate it. And since I have a long horizon for actually needing the underlying asset to be profitable, if it just gets average VTI percent increases over time, I’ll end up waaaaaaay ahead of where IBC would’ve left me!

    Reply
  • Dan January 29, 2021, 6:28 pm

    Margin rates on stocks is 50%, however, if one were to purchase 10 year treasury bills with the cash in your account, the margin rate is 90% of the value of the bills, so you could borrow 90% of the value of the treasury bills to purchase your new house. Since they are backed by the full faith and credit of the US Government they are risk free.

    Also, since this margin loan is interest only, the interest from the 10 year treasury bill could help pay the interest on the margin loan and there would be no risk of it losing money in a market crash. It is more conservative, but it would almost be free money with virtually no risk.

    Question; if the 10 year treasury bills were margined for the loan, could the same margin also be used to trade options in the account? Curious.

    Reply
  • Dan January 29, 2021, 7:03 pm

    We had been discussing in the forums the last few weeks, lots of good perspectives in here.

    https://forum.mrmoneymustache.com/investor-alley/what's-the-tldr-on-margin-loans-on-large-stock-balances/

    Reply
  • Maureen kennedy January 29, 2021, 7:08 pm

    I recently did exactly this to buy a replacement home before selling my existing. Used Schwab‘s pledged asset loan facility. Closed in eight days. Not quite as low an LLC interest rate but no need to season funds. I think you would have to register as a loan broker in your state if you provided more than X loans a year. At least I recall that’s the case in California. So I’m not sure about turning it into a business. But looked at another way, you are essentially lending out your excellent credit rating. I have had clients take funds out of their IRA for purposes of closing a transaction, as long as they can replace within 60 days and avoid penalties and taxes.

    Reply
  • Douglas January 29, 2021, 8:35 pm

    Thanks for the info, hadn’t ever thought of this.. couple questions:
    How long do you have to make the margin call if one happens?
    What are repayment terms? As long as interest rate is below house appreciation rate, would we ever need to pay off the margin loan ?

    For me I was thinking about paying off my 3.25% loan with cash, if I can do a margin loan at 1% and be ready to pay it off with either cash or heloc it seems like a must do

    Reply
    • Eric B January 30, 2021, 10:52 pm

      Look at the Interactive Brokers customer agreement. I haven’t personally confirmed this, but I’ve read elsewhere that they just automatically start liquidating your shares (presumably at a steep loss).

      Reply
      • Douglas January 31, 2021, 3:06 pm

        Based on that it seems to me that if you are going to pay cash for a property and you have 2x your purchase price in bonds/cash equivalents in your portfolio it could be done some way like this:

        Purchase 10/30 year treasury equivalent to your purchase price, then the other half you have in less than one year treasuries.

        Then if margin is called you don’t lose much, assuming they auto liquidate the short term bonds.
        If it’s not ever called, keep the margin loan active as long as the rate is less than what the longer term bond is yielding.

        If you’re paying cash anyway and you already have it in cash, you’re making the spread between the long term bond and the margin loan rate as opposed to paying cash.

        Another risk I was thinking about is: even if your collateral for the margin loan hasn’t gone down in value, but the rest of the balance sheet for the brokerage is really bad, they could still call the loan. If you’re using it as mortgage replacement , recession events are likely to happening the long run

        Reply
        • James February 17, 2021, 5:29 pm

          Yeah, even with a call you can come out okay — you still have the house you paid cash for, after all. The worst case scenario (if you’re only using 20-25% margin) ends up being pretty similar to selling stocks and buying the house, but the best case scenarios and average case scenarios are much, much better.

          Reply

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