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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.

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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!

  • TheSteve January 29, 2021, 8:47 pm

    This is a valuable technique MMM, however I think the risk exposure is a lot higher than most people would be used to incurring. It should be used with the utmost of caution and respect, especially in these volatile markets/times. Firstly, it should be pointed out that margin is generally extended at the discretion of the brokerage and while it is generally pretty dependable it can be impacted very suddenly by severe volatility (I include a note on margin from IBKR’s website below). We have seen examples in the last couple of days where certain shares have had their marginability reduced with little to no warning. You advocate a backup plan with a backup plan, but I think that the speed with which the markets can move at times could very easily overwhelm a casual user of this technique and inflict forced security sales within their account and compounded loses. While the average MMM reader is pretty savvy and would likely use this technique cautiously and adeptly the article does seem to gloss over the risks, especially with the example of a multi-unit purchase using Apple and Tesla stock!!!!

    IBKR note:
    • In the interest of ensuring the continued safety of its clients, the broker may modify certain margin policies to adjust for unprecedented volatility in financial markets. The changes will promote reduction of leverage in client portfolios and help ensure that clients’ accounts are appropriately capitalized.

    Reply
  • Julia January 29, 2021, 8:49 pm

    I went to setup the account immediately, as I have an upcoming tax bill and lower than expected cashflow in the next few months and I was hesitating to sell my stock to cover it, but eTrade loan % is ridiculous.
    However, I’m a bit confused by their pricing.
    1. It seems they charge $10 per month for IBKR PRO account. Since I don’t need the loan right now, can I open Lite and move to PRO later? (I would assume so, but their registration flow doesn’t mention it)
    2. The don’t have commission within LITE for US Exchange-Listed Stocks / ETFs, but it is unclear what is the commission within PRO. Do you know how it compares to Vanguard if I transfer some of the Vanguard funds?

    Ideally, I assume, it would make sense to create LITE account, transfer the funds to wait out the lock, and once you actually need the loan transfer to PRO, correct?

    Reply
  • JoeO January 29, 2021, 9:12 pm

    Here is the founder and chairman on CNBC yesterday:

    https://www.youtube.com/watch?v=7RH4XKP55fM&feature=emb_logo

    Reply
  • George January 29, 2021, 9:13 pm

    Find the link at Nerdwallet and you get an extra 0.25% off the margin loan rates for the first $100,000.

    Reply
  • Mark January 29, 2021, 9:24 pm

    Thank you for this great tip! I never thought about using margin loans like this! Always assumed it was for trading. We have a trust account with Vanguard. Using your referral link takes you to a regular account application. I will have to open a trust account in order to transfer in kind assets from the trust at Vanguard. Anyone know if the the sign up bonus with the referral link can be used for trust accounts?

    Reply
  • Michael January 29, 2021, 10:10 pm

    I have often read your early posts when I needed to feel grounded and have the courage to not give up on my dream to one day be able to retire. You have written some great posts, but I just can’t relate to today’s post. What does this have to do with the role of money in the life of an ordinary person? This is the kind of nonsense the ultra wealthy preoccupy themselves with. Face it. You are now so wealthy that you have completely lost touch with the common man and the core themes you so elegantly wrote about in the beginning. I don’t know why I should feel betrayed. You owe me nothing and your earlier posts have helped me greatly. Please do not write some duplicitous post this year about living on less than $24,000 a year. Everything and everyone changes. Even Thoreau left Walden pond. I will revisit your website but confine my reading to your earlier posts. Just go by the Tesla and get it over with.

    Reply
    • Mr. Money Mustache January 30, 2021, 10:05 am

      Awww, sorry to hear you are feeling that way Michael!

      The funny part is, YES I still do live on $20k per year, and I spend most of my days covered in sawdust doing carpentry, biking to the grocery store when needed with a janky $100 bike trailer to haul home the load.

      When I retired in 2005, six years before even writing the first MMM post, we STILL had sufficient investments that a margin loan account like the one described in this article would have been super useful. And I still would often leverage everything I could to jump to a new fixer-upper house, or start a business with the goal of working with and helping a friend.

      More importantly than my own story, this blog is read by people of all income and wealth levels – and quite a few of them are wealthier than I am (some by a multiple of hundreds of times).

      So, we’re going to cover a variety of topics, and some of them are going to involve some big numbers. And others are still going to involve squeezing a few kWh off of your electricity consumption and doing barbell squats in the snow and leaving your clown car at home more often.

      MMM never really changes, because the guy behind it is pretty damned stubborn :-)

      Reply
      • Alex January 30, 2021, 11:07 am

        This post is even more important for those who don’t have a lot compared to those who do. This is a way to start compound interest earlier in life, before even having the assets yourself. For those who spend more than 25k/year, this may be the only way to get access to enough compound interest to achieve FIRE.

        Reply
  • Henry January 30, 2021, 1:37 am

    Is it feasible to do this for 20% down cash and combine it with a mortgage? You would be able to get a house for “free” right?

    Reply
  • Liran Brimer January 30, 2021, 2:23 am

    I’m an IB client using withdrawal using margin to buy a real estate the same way. Few points:

    1. My understanding is that Protfolio Margin plan would always reduce your risk if you are using unexotic stocks like VTI, because they give better margin requirements. So why not reduce the Margin Call risk?

    2. My understanding is that the required safety maintainance margin is 25% and not 50% in practice.

    3. It would be great post to dig into the numbers and show how to actually calculate the risk using numbers taken from IB website screenshots. And maybe explain the ib terminology along the way (what is maintainance margin, how its calculated, etc).
    For example, calculate the % drop that would trigger a Margin Call.
    That is *the* risk after all, and it’s not so trivial to calculate.
    I actually built a Google spreadsheet calculator for this.

    4. The idea to retire based on margin instead of selling to finance your living costs is genius. But it actually means you can retire earlier because you now need less! So its also an idea to a great blog post on how much you need when you use that techniqe?

    Reply
  • Paul January 30, 2021, 3:58 am

    Pete – I love this article – and so many potential options for this hack.

    I’m in the second year of a one year sabbatical in Spain and about to extend for another couple of years. That would have meant selling some index funds to fund our living expenses and paying capital gains at 21% in Spain. An IB margin call will save us the 21%. I’ve been using IB for nearly 3 years – the only western broker that I could open an account with whilst resident in Zambia – and they’ve been great so far.

    One other option springs to mind for some friends moving to Spain. There’s a lucrative visa option for non EU citizens which requires you to have a year’s worth of living expenses in cash in a Spanish bank account – and for a family of their size, that would be c.$75k. A margin call would be a great way of meeting this criteria without having to reduce their investments / trigger a capital gain.

    This also means I can reassess the level of emergency fund I feel comfortable with.

    Reply
  • Mr FOB January 30, 2021, 4:24 am

    Wouldn’t you prefer to use short term bonds as collateral for such a loan? You largely eliminate the risk of a margin call with potentially horrible financial consequences at the cost of losing the opportunity to profit from stock market rise.

    Reply
  • Vasco January 30, 2021, 5:15 am

    Hey MMM, great story! This got me wondering whether a margin loan could also be used to avoid withdrawing from a portfolio during a rough patch – say if you pull the trigger in August 2008 or Feb 2020, just before a big downturn, borrowing 4% of your portfolio on margin might actually be safer than selling shares at depressed prices. When prices go back up you could then sell to repay the loan and make your withdrawals.

    Reply
    • DM February 1, 2021, 1:30 am

      The opportunities are endless. I really like this idea because in big downturn events, interest rates typically drop which helps with the margin rates.

      Reply
  • Liran Brimer January 30, 2021, 5:16 am

    I think your interest is higher than 1.09%, because the first 100k are actually higher with 1.59%, and just every dollar after that has the second tier interest

    Reply
  • Dark January 30, 2021, 5:23 am

    Funny enough, Tynan just had an article about margin loans 6 months ago. https://tynan.com/billionaire-part-1

    The blogosphere hive-mind in action.

    Reply
  • Poor Charlie January 30, 2021, 6:18 am

    Broker who has given clients call for margin – it is no fun. Do not risk what you have and need for something you only desire. If there is 1% chance of ruin, don’t do it.
    Berkshire 2017 annual report: This table offers the strongest argument I can muster against ever using borrowed money to own stocks. There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

    In the next 53 years our shares (and others) will experience declines resembling those in the table. No one can tell you when these will happen. The light can at any time go from green to red without pausing at yellow.

    Reply
  • Figuy January 30, 2021, 8:10 am

    One think to keep in mind with margin loans, is instead of ordinary dividends, you know get what interactive brokers calls “payment in lieu” which is the same amount but is taxed at your marginal income tax rate rather than the typically lower dividend rate which result in a 5-20% higher tax rate on your dividends. It’s not too bad compared to other borrowing alternatives unless you carry a lot of high dividend funds in your account. Also, margin rates are much higher at just about every other brokerage than IB.

    Reply
  • Steveark January 30, 2021, 9:08 am

    I hope this isn’t redundant but what exactly would happen if the stocks in your account lost 50% of their value by next week? Would that trigger a sell off that you couldn’t prevent because most of your cash is now in a house that might take a few weeks to sell? Or would the stock value still be high enough to cover the minimums. I’m assuming you’ve got a contingency plan for that but I couldn’t find it.

    Reply
    • Mark January 30, 2021, 9:28 am

      The key here is to not over leverage. The broker will allow you to borrow up to 50% of your account value. If your stocks crash by 50% then you are screwed, your margin is now 100% of your account value. Say bye bye to your stocks and then some. Now if you margin only 20% of your account value, you should be able to weather a 50% drop. Example: $1,000,000 in stocks, margin 20% = $200,000. If your portfolio drops in half to $500,000, your margin is now 40% of your account value. You should still be safe from a margin call and able to wait out the carnage. However, this strategy works because IB offers such low margin rates. I would not do this with a broker charging 6%+ interest.

      Reply
  • Christine Caturano January 30, 2021, 9:44 am

    If you are investing in real estate, especially buy and hold, you could use any money you have in a simple self-directed IRA or (if self employed, a SOLO 401k) to purchase real estate as CASH. It is NOT taking a loan, it’s your retirement fund making the purchase/owing the real estate . This is not a cash in pocket scenario (all expenses and profit flow out/back into the fund) but it costs you nothing to use your money. Just another option.

    Reply
  • Craig January 30, 2021, 9:53 am

    Really interesting article. For us Canadians may be a way to make your mortgage interest tax deductible. Not sure it was addressed, but a purchase then sale to a friend once they had their standard mortgage arranged would trigger land transfer tax here in Canada twice, each time property ownership changes. On $400K in Ontario it would be $4,475 for purchaser one, then friend would have to pay $4,475 upon transfer of title to them. Just a consideration to include.

    Reply
  • Kevin Puetz January 30, 2021, 9:59 am

    > Yes – if I understand your question correctly, you would only be risking the amount of shares used as collateral on your mortgage payoff amount.

    This is not always true: if you fall below maintenance margin, the brokerage can either demand you immediately deposit more, or else liquidate your positions to get back up top the required margin. In the case of IB, they generally do not make a margin call; they just automatically liquidate whatever they want within the account without advance warning, generally with a “whatever we can get” market sell order.

    This liquidation should get you back out of debt (albeit your account might be entirely wiped out by selling at such a bad moment, and you might still owe capital gains tax if even such a drastic fall didn’t get you back down to the cost basis on the sold assets). For a retail customer, it ends there, with at worst loss of the account, and maybe unwanted tax conseq1uences. But since MMM selected to be treated as a Professional client, instead of Retail (to get the better rates offered), this margin loan is a recourse loan; IB can and will come after him for any remaining balance if liquidation didn’t cover the debt.

    None of this is to say MMM did something ridiculously risky – he didn’t pull out anything near the max borrowing limit, the collateral is pretty stable index funds, he didn’t didn’t use the withdrawn cash for consumption (it’s invested in real estate, and so he could pursue more traditional refinancing of the real estate if he needed to repay IB). But it still should be said that, by comparison, a conventional mortgage is:
    * fixed rate
    * fixed term
    * non-recourse (the most the bank can take is the title to the property pledged as collateral)

    And this is
    * variable rate (changing daily)
    * interest-only (no principle is being repaid at all)
    * balloon callable at any time (IB can just decide they want to be repaid, in full, *now*, change your required margin, and liquidate the invested position themselves to do so). It’s not in their business interest to be seen as capricious about this, but they’re going to move, immediately, if they think covering the loan with the invested collateral has become risky.

    This is why it can be so cheap and so easy. The collateral is easy to value in real-time, easy to liquidate in seconds, and they have the right to do immediately and on their own discretion, with no drawn-out foreclosure/eviction process. IB isn’t carrying much risk, and doesn’t need to charge much above basis interest rate to cover the operation..

    Reply
  • FIRE v London January 30, 2021, 10:26 am

    Great post MMM, and welcome to the bloggers-buying-homes-with-margin-loans club.

    One very important difference between margin loans and mortgages that is worth flagging is that your loan provider (aka broker) can, and does, move the goal posts at a whim. The recent GME/etc stuff is a good example of their absolute power to do this – but having your loan provider do this to you over a big loan, with minimal notice, is quite scary. Your mortgage company can’t do this – the most that can usually happen is interest rates move under you, rather than it just suddenly decides not to accept your collateral any more and instead asks for its money back.

    Examples of your broker moving the goalposts include when trading volumes drop too low on particular securities – something very much outside your control and hard to predict.

    I have margin loans with two brokers, IBKR and my UK bank. IBKR is much better, and has been excellent. Nonetheless even IBKR has ‘moved the goalposts’ on me about 3 times in 5 years. I run a very conservative level of leverage, so none of those times really mattered to me – and I was given notice in some cases (e.g. when they say we will be tightening our margin requirements over the next 30 days, one day at a time). But it is a risk that I wasn’t initially aware of when I took out my first big margin loan and would have liked to have known in advance!

    Reply
  • scott January 30, 2021, 10:34 am

    This strategy is similar to picking up pennies in front of a steamroller. Tiny upside. Massive downside. Exposing yourself to a margin call is the exact opposite of Financial Freedom. You are relinquishing control of your portfolio and giving someone else the opportunity to force you out of your positions at the worst possible time.

    Reply
  • Lauren January 30, 2021, 10:41 am

    I’ve used a margin loan twice to buy a home. In both cases, the mortgage market was going sideways. The first was during the last financial crisis. I wanted to write a quick offer to buy a property that had just been listed as a short sale. My all-cash offer was snapped up by the bank that just wanted to get this property off their books. The second was just this spring. It was right at the bottom of the COVID dip in the markets. Mortgage brokers were freaking out about a downturn and afraid to do anything but very standard loans. Because I’m post-FIRE, my income is not traditional, and they discounted it so heavily I couldn’t qualify for a loan. I did a margin loan instead, got a lower interest rate, and made a cash offer (accepted!). I’m now in my dream home, and paying down the margin loan on a 10-year schedule.

    Reply
  • Alex January 30, 2021, 11:02 am

    There’s a book that fleshes out a similar approach for investing purposes, “Lifecycle Investing” by Ayres and Nalebuff. A paper that outlines a lot of principles in the book is linked below (has several simulation tables to show the ideal amount of margin to use):

    https://spinup-000d1a-wp-offload-media.s3.amazonaws.com/faculty/wp-content/uploads/sites/8/2019/06/LifecycleInvestingLeverage_v2008.pdf

    Of note, for investing they mention that you can use either margin or LEAPS. LEAPS are interesting in that you can hold them in your retirement account! While they are options, they are very different than the super volatile short-term options being highlighted these days, and they can serve as another way of getting margin.

    However, using LEAPS towards this end is very complicated. MMM, would you consider writing up a post on how to use LEAPS towards this same purpose? I’d be happy to co-contribute if helpful, though my understanding in this domain is admittedly very limited.

    You’re excellent at breaking these kinds of things down into feasible steps – it would be a relevant complement to this post and I believe would be very helpful for many.

    Reply
  • Canada Jeff January 30, 2021, 12:37 pm

    I have a margin account at Questrade (Canada). I just checked. It appears it would let me withdrawal 70% of my total balance into my chequing without selling equities (all etfs, this is where my money goes when tfsa, rrsp, and resp get filled for the year). So I think this is essentially a margin loan. Here are the interest rates: https://www.questrade.com/pricing/self-directed-commissions-plans-fees/margin-interest?_ga=2.119217801.181139096.1612034670-298526114.1612034670#interest

    Reply
  • CH January 30, 2021, 12:40 pm

    With IB, can you only borrow against securities, or can you borrow against the total including cash on your account?

    I have a note due at 5.749% in 5 years. (I know, I should just take the excess cash and pay off the note, but I want the flexibility.) And I’d rather have interest-only at 1.59% – would save several thousand $ if so.

    Reply
    • Mr. Money Mustache January 30, 2021, 3:54 pm

      The way it works is that it would be impossible to have both cash and a margin loan in your Interactive account at the same time. And this is a good thing! (no sense holding cash while simultaneously in debt, if you can make instant withdrawals from that same credit line)

      So if you withdraw money from IB, you will first pull out any cash that might be in there, and only at that point would a margin loan be initiated against the stocks that you are holding. As you gradually pay back the loan (as I am now doing in my own account), the negative balance of the loan shrinks, and cash remains at zero until you get to the breakeven point.

      Reply
  • Christof January 30, 2021, 2:03 pm

    That depends on the country. In Germany a bank can expect to get paid back everything. The value of the house is merely for managing risk, but not a legal boundary. If the bank sells the house and the proceed is too low, you still owe the difference.

    Reply
  • Financial Velociraptor January 30, 2021, 2:12 pm

    I’ve been fully invested by putting my emergency fund in the market for a long time. IB margin loan IS my EF. If I have to replace the HVAC system on the house for example, a temporary 7k loan at less than two percent is gold.

    Reply
  • BlueOak January 30, 2021, 2:51 pm

    We used exactly this margin loan tool as a bridge loan for our mother to move into a highly in demand wait-listed senior community. She would have lost her place on the wait list if she had to wait for her existing home to sell. Or would have been forced to deal with the tax consequences of selling investments.

    In fact, we are repeating the same margin bridge loan method again right now – so she can move into a different unit in the same community.

    Reply
  • Mary January 30, 2021, 5:42 pm

    Longtime reader here… I work as an accountant in a family office for a billionaire and this is exactly how he pays for his lavish lifestyle. He only uses a very small percentage of the margin he could use so it is very safe for him

    Reply
  • LennStar January 31, 2021, 2:53 am

    1% is redicoulus (for normal people). And here I thought I had made the deal of the year with my installment loan of (calculated for whole sum) 1,5% yearly. After all, that’s what you get in dividends, the stock price gains are all yours…
    (Basically I pay the loan instead of buying the index, with the aforementioned bonus. Even conservative that should make 30% more at the end of the loan time, when I FIRE)

    Reply
  • ChrisD January 31, 2021, 7:12 am

    I guess we all already know that too many people buying too many stocks on margin is essentially what caused the 1928 crash. Or at least what made the drop so fast and runaway and so deep. i.e. people where having to sell all their good shares to cover their margins on the overvalued shares. When I wanted to put some money in my stocks and shares ISA account in the UK, they wouldn’t accept a credit card, which very mildly inconvenienced me, and which I strongly agree with.

    Reply
  • ChrisD January 31, 2021, 7:42 am

    In the UK, mortgage rates are only ever fixed for ~2-5 years and you usually have to renegotiate your rate and pay fees every few years (and you often can’t even pay off more than ~10% extra each year). The variable rate of a margin would therefore be comparatively less disadvantageous in the UK. Though obviously changes to your mortgage rate are much more buffered. Plus yes, in the UK you do trigger stamp duty taxes with each sale of the house, so I can’t think of any way to do your particular setup without having to pay stamp duty twice (in case you are thinking you could just call it a gift, you can’t). Of course, depending on the amount, some tax money would be an acceptable price as just the cost of getting the deal locked in. For my back of the envelope calculations, for some scenarios, I think the taxes could be less than realtors fees.

    Reply
  • Dana January 31, 2021, 8:42 am

    My ideal lifestyle includes having all my friends live within biking distance….very cool way to make that happen !

    Reply
  • jack chadowitz January 31, 2021, 12:22 pm

    Another takeaway:
    Bad neighbors. I had forgotten the frustration, mental anguish and other effects of bad neighbors and that one can get a bad neighbor at any time that can literally ruin your life until you move. So having friends surround you is a solution until they are no longer friends and they may have bad neighbors on their other sides.
    My solution was to have a large property which created a buffer zone but was rather lonely.
    My present solution is to live on a sailboat in a marina. It is more work but has many benefits. Low cost. Enormous beautiful outdoor area to enjoy without maintenance costs. Don’t like the neighbors, easy to move. You can move to get the best weather for each season. Healthy living, built in exercise. And wonderful people. It takes a certain type of person to liveaboard. Definitely not for everyone but has worked for me.
    An even better way is to live at anchor or on a mooring. No neighbor problems but lots of work. We lived comfortably off the grid for 6 months in New Bedford MA on a mooring.

    Reply
  • Marylin January 31, 2021, 6:17 pm

    Margin loan aside, you still had to pay closing costs. It sounds like the house was listed by a brokerage so some real estate commissions may have been at play. What about transfer and recordation taxes? Where I live in MD they aren’t negligible. Assuming a quick sale over to your friend, will she pay closing costs twice, yours (your purchase) and hers?
    I am intrigued by the business idea of facilitating cash purchases for clients but the double closing costs may be a deal killer. Would love to know how you navigated this.

    Reply
    • Mr. Money Mustache February 1, 2021, 11:30 am

      Hi Marilyn, yes those are good things to consider in any deal.

      In our case there were no realtors/brokers involved, no transfer tax of any sort. A $25 county recording fee is just about the only mandatory cost, although we also chose to pay a title company about $1400 to run a title search, issue title insurance policy, and facilitate the closing/escrows. Heritage Title here in Longmont did a great job and offered a better price than some of the competing offices (thanks Greg G!)

      When we re-sell the house for a second time, the title company will only charge us about $500 for a “re-issuance” and handling the second transaction. So, I’d estimate that we are adding $525 of total costs for this double house transfer deal, compared to if she had bought it herself the first time.

      Reply
  • Brian Thomas January 31, 2021, 10:48 pm

    I’m not sure how real estate sales tax works in your state, but in my state the rate is 1.28% and the seller pays the tax at the time of sale. On a $400,000 sale that’s $5,120. You’d probably want to build that into the sales price to your friend when you sell the house. It will suck a little for your friend because she is going to have to pay it a second time if she sells the house in the future. However, you can call it a “finder’s fee” in helping her get a house that she had a 0% chance of getting without your help. In a state that doesn’t have sales tax (like Oregon or New Hampshire) it’s a non-issue.

    Reply
  • Charlie February 1, 2021, 2:49 am

    On the actual property purchase itself, are there no taxes in the US on buying and selling property? Not talking about capital gains, but talking about taxes to register the property?
    We have taxes of 5% to 8% on value of property that goes the tax authority on transfer of the property (transfer tax). Does that not exist in the US?

    Reply
    • Mr. Money Mustache February 1, 2021, 11:20 am

      That is correct – and thank goodness! The more hurdles we put up for people to buy and sell their houses and move, for example so they can live closer to a new job or other life situation, the less efficiently we will be able to live. I think it’s always a bad idea to levy large taxes on a behavior we are trying to encourage.

      In fact, one of the reasons I wrote this article is to share just one more trick to make house purchasing easier and encourage people to make the market more fluid. If you are ready to downsize, or wish you lived somewhere that would allow you to drive less and walk more, make the move NOW! Life’s to short to live somewhere just because you are stuck in a house you bought long ago.

      Reply
      • jwheeland February 1, 2021, 12:12 pm

        Hi MMM and Charlie,

        My city has a 4% transfer tax. I was also concerned for MMM and his friend because of this. However, this could be overcome by MMM being the bank for his friend and recording a mortgage against the purchase and when the friend refinances then MMM would be paid off and a new mortgage from the bank would be on the property – but transfer tax avoided.

        Thumbs up for no transfer tax in CO and Longmont.

        Reply
  • Alan February 1, 2021, 11:49 am

    Thank you for posting this. I could have used this 3 years ago. I sold stock to buy a house. I knew at the time, I had a lump sum coming soon that would have covered it. This generated a $40,000 tax bill and my Medicare monthly bill increased by $350/month each for my wife and I, for a year. I plan to upgrade from a fully owned house to a different one this year. I plan to buy the new house before I sell this one and put the proceeds into the new one after the sale. I was dreading the prospect of working with banks on a loan for 3 to 6 months so as not to have to sell more stock. I will use your suggestions. – so much easier! All the best, Alan

    Reply
  • Man Tan February 1, 2021, 1:25 pm

    This is nothing special, of course one can use a LOC or Margin to buy an investment or just spend it on a new car, renovation etc. But what got lost in the oohs and ahas is the risk of something changing with the friend for whom this house purchase is made. Could be cold feet, illness, a sudden financial downturn, etc. Then you will be stuck with an unwanted (for you) RE. The RE market is hot and most likely you can quickly sell, probably even make a profit with some patience but what about the time loss? It is surprising that on a finance focused blog most people are still driven emotionally not pragmatically.

    Reply
  • Mac February 1, 2021, 1:34 pm

    It’s a nice post, but the team writing up code and managing this company are a bunch of clueless fools. I was on hold for over 2 hours with this company because I wanted to change around my referral so MMM would get credit. No web interface for that and the rep could not help. So I cancel the previous account opening, but enter wrong email address the 2nd time around. They let you correct the email address but continue to email to original email address. Ignoring your correction. They are sending a code so you can start your service, but you would never get it (if you made a typo the 1st time around). A simple coding error, but no one bothered to test it out before adding it to production. I’d be very leery with this company handling your money!!!

    Reply
    • Mr. Money Mustache February 2, 2021, 7:46 am

      Thank you for your valiant and generous attempt Mac!

      But I agree – as with all customer service I’ve ever experienced (except maybe the City of Longmont’s utility billing department, which is excellent), if you ever find you have to make a phone call, you’ve already lost.

      Interactive Brokers seems a bit overrun right now – I eventually talked to one of their higher-ups on the phone, and they are signing up customers a bit too fast, while simultaneously hiring and training new staff a bit too slow. It’s a boom time right now, but should settle out eventually.

      So, all of their built-in tools work fine, but if you run into a snag the support is not great. The best strategy for now is to go with the flow: do the things the system allows you to do while not trying to do anything unusual.

      One example: my new-ish account was limited to $200k per day ACH withdrawal. So in order to pull out $260k, I could try for the full amount, get an error message, and then go into telephone wait time hell to try to get a special override (which is what I did).

      OR

      I could have withdrawn $199k the first day trouble free just to be safe, then logged in the next morning and grabbed the remaining $61k and never had to pick up the phone.

      Anyway, I will update this article to give a word of caution about the over-stressed nature of their support. We should call them out to make sure they fix it over time – only the squeaky wheel will get the oil.

      Reply
  • Mike February 1, 2021, 2:22 pm

    So this website only serves to create links for various referral programs. Its simply a cash cow you squeeze every now and then.

    Reply
    • RobRdam February 1, 2021, 3:37 pm

      Hello Mike, please feel free to invest as much time and effort as MMM to create your own blog, then you can squeeze your own cash cow.

      Reply
  • Michael Bradley February 1, 2021, 2:53 pm

    Now, this is pretty slick! You know, I have been following the blog since about 2012, 2013 after migrating over from ERE.

    I love how it’s has pivoted from the bunny slopes – “don’t drive a ridiculous car 50000 miles per year” to doing these double-black diamond maneuvers.

    Reply
  • Vijay February 1, 2021, 8:02 pm

    This is mind blowing. Cant appreciate enough

    One Risk i see potentially is as interest rates rise, home prices drop. However the unprecedented money printing should keep home prices stable at the least.

    Reply
  • Mac February 2, 2021, 7:46 am

    So I posted a negative, but honest experience with Interactive Brokers. Why did you delete the post? When you only show positive reviews, this gives a distorted review of their services. Or do you only like to share posts that support your articles and contribute to your potential gain from referrals?

    Give people the honest facts and let them decide what to do with it!!!!

    Reply
    • Mr. Money Mustache February 3, 2021, 7:24 am

      Hi Mac, I just searched for your email address in the comments system here and I see that it was already posted yesterday and I had already written a response. Maybe you need to refresh and/or try a different browser to see it?

      Honest negative reviews are VERY welcome here, and in fact I am so far not all that pleased with Interactive’s lower levels of customer service.

      They seem to employ a lot of drone people who don’t really have the answers, so they post a non-response to your inquiry and then immediately close the ticket as “RESOLVED!”, when it is anything but. Only when I escalate to the core staff do I get real answers. I’m still working on this and will share some better contact info once I have it. (Anybody else have inside connections there?)

      Please feel free to reply here with your thoughts, and/or edit your earlier comment if the system allows you to do that now that it is approved.

      Reply
  • John February 2, 2021, 11:01 am

    Do they charge higher fees on their funds than say Vanguard or betterment? From loan providers perspective, is the risk of providing a loan really that much lower if its backed by a significant amount of stocks rather than the value of a home? I guess I’m just curious if theres some sort of catch to this. Thanks!

    Reply
    • Mr. Money Mustache February 3, 2021, 7:37 am

      Hi John,

      Brokerages don’t charge fees on the stocks you hold, regardless of the company. But one thing to note about the security of the loan:

      When you stop paying your mortgage, the bank has to go through a painful and highly-regulated foreclosure process that can cost them tens or even hundreds of thousands of dollars and take years to complete.

      (I know this because I’m currently a noteholder on a defaulted PeerStreet loan and I’ve been watching the status of my little $1000 note that went sour in 2017 – still no resolution in sight because the borrower seems to be a very slippery/shady person. A very valuable education on the foreclosure process that is almost worth the $1000 tuition for me!)

      Meanwhile, if your brokerage needs to cover your margin loan, they can sell your shares and lock in their cash literally within a few seconds during market hours. It can be done all by a computer algorithm with no humans involved – so it’s very cheap and safe for them.

      Reply
      • Alexandre February 12, 2021, 10:09 am

        After devouring this post which literally had the same effect as MMM described as a potential very interesting tool used in the right conditions, I’m left with a few worries that I would be curious to know how/if people using it like MMM deal with. I totally get the mitigations that you can put in place against market crashes by using this in a very low ratio of margin loan / available balance, but how do you protect against flash crashes which are irrational events like the one in 2010 where VTI dropped to barely nothing for a few seconds. Would this trigger an automatic sell from IBKR to cover margin loan ? As we people reading this aren’t day trader, how do you protect against this kind of risk (which I admit is pretty low and is usually resolved in a few hours)? Am I missing some kind of safeguard that IBKR would have put in place to prevent that ? Thanks,

        Reply
        • Mr. Money Mustache February 12, 2021, 5:32 pm

          Interesting question Alexandre – I had no idea that the 2010 Flash Crash had caused such crazy whiplash – over 99% loss of value and then immediate recovery in the same day. I would sure hope that a sale would not be triggered (after all it’s not in the brokerage’s account to sell at such a large loss either), but this is something I will research more as well.

          Does anybody else know? Also, are there any changes in place now to prevent something like the flash crash from reoccurring?

          Reply
          • Jim March 28, 2021, 3:00 pm

            Hi MMM,

            Longtime reader here. Worries about a flash crash are the reason why I haven’t done this in the past. Have you found any mitigating factors? I’ve looked into this in the past and was not successful in finding enough info to make me comfortable.

            Thanks!

            Reply
  • George February 2, 2021, 12:48 pm

    If you want to push this idea further, Interactive Brokers also issue a [debit card](https://www.interactivebrokers.com/en/index.php?f=26451) which might reduce the need to keep a large checking account balance (and let you invest those funds instead).

    Reply
  • Doug February 2, 2021, 6:45 pm

    So you’re transferring Vanguard shares from Etrade (which, by the way, I don’t find listed on the MMM Recommends page) to Interactive Brokers. Were the Vanguard shares originally purchased through Etrade? And, if so, wouldn’t that necessarily incur fees from Etrade? Why not buy them directly through Vanguard and transfer them from Vanguard to Interactive Brokers? I’m failing to understand what role Etrade plays in this.

    Reply
    • Mr. Money Mustache February 3, 2021, 7:31 am

      Hi Doug, I think you just have a bit of confusion over the difference between funds and brokerages.

      Vanguard offers a bunch exchange-traded funds (ETFs), which trade just like the shares of individual companies, and you can buy them through ANY brokerage, including Vanguard’s own brokerage if you like.

      Meanwhile, they also offer “mutual fund” versions of these same funds, which you can generally only buy through a Vanguard account.

      In either case, the low fees are built into the fund/ETF itself, and the brokerage collects no additional fees for holding them. You only pay a few dollars per trade of commission when buying or selling them.

      Etrade’s role is just another brokerage – a direct competitor to Interactive Brokers.

      Reply
      • Chris Bullock February 3, 2021, 9:23 am

        I think another point of confusion is the transfer between brokerages does not involve converting the portfolio to cash and then repurchasing them in the new brokerage. This would trigger capital gains if in a non-registered account. The actual equities are transferred intact at no cost, unless there is an account openning/closing charge (but most brokerages are trying to get your business, so it’s doubtful and most actually usually offer cash or stock bonuses to attract your business).

        Reply
  • Derrald February 3, 2021, 2:44 am

    Hi MMM (Other Others),

    Great post, very useful. I immediately signed up for an account (using your referral link) and will borrow to pay off a rental property mortgage I was already paying off in the next three years.

    My question is whether it makes sense to sign up for (or in my case, upgrade to) the “portfolio margin” option? It seems the only difference is a minimum of 110K, but now the margin requirement is 25%. Holding the amount you borrow constant (say 20%), this just further reduces the likelihood that you wake from a nap to find out that IB liquidated your account because the market dropped 80% :)

    I couldn’t find any cost or difficulty in opting for the “portfolio margin” option versus the “margin” option. But I may have missed something. Any ideas?

    Reply
    • Derrald February 3, 2021, 2:45 am

      (Or Others) :)

      Reply
  • Ray February 3, 2021, 9:44 am

    The risk here is that Interactive Brokers may change their margin requirements for any security at at any time (and based on past experiences, they do it quite eagerly and proactively; which is actually a good thing in the grand scheme).

    So they may require you to post more collateral or they may withdraw your margin loan entirely. This unlikely event might, for example happen, when the next band of several million kids start buying GME shares that make some huge hedge fund be unable to cover. If the huge hedge fund goes bankrupt, the obligation to obtain shares at inflated prices is inherited by Interactive Brokers.

    And in the worst case that Interactive Brokers’ $10 billion cushion reserved for such purposes is exhausted, they (or the clearing house) may not be able to return YOUR shares (as well), in which you’d be left with $500K SIPC insurance (as US customer) or in EU, the laughable investment insurance of 20K Euro. But of course, Interactive Brokers will liquidate margin loans to raise cash before they declare bankruptcy.

    TL;DR you may end up on Melvin Capital’s side of the GME trade without ever having heard of it.

    Reply
  • Nick February 3, 2021, 11:55 am

    Long time reader, big fan!

    Just wanted to clarify what you said about fluctuating risks (which should be highlighted more!). It’s currently so low at Interactive Brokers due to the low Fed interest rates. However, when it does increase, how does it change your calculus on borrowing / using a margin loan to buy the house?

    If at one point, the margin loan rates are higher than mortgage rates (is that possible??), could one convert that loan back to a regular mortgage if the interest rate is higher than a regular mortgage?

    Reply

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