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!

  • Pras February 3, 2021, 1:25 pm

    This blew my mind. Thank you!

    Question: what are the transaction costs of moving from Etrade? If I moved my VTSAX from Vanguard, is there a higher annual fee, for example? Will you return to Etrade after the loan concludes?

    Why does IB offer such a low margin rate vs Vanguard when Vanguard prides itself on low-cost products? I’m guessing IB gets that 5% differential in some other way? Thanks!

    • Mr. Money Mustache February 3, 2021, 10:05 pm

      Hi Pras,

      I think Etrade dinged me $75 for the outgoing transfer. But aside from that, neither brokerage charges any fees for holding your shares. IBKR does charge $10/month if you have a “Pro” account, which is necessary for the lowest margin rates – but they deduct from this any commissions you pay that month from making stock purchases, which I believe are about $3 per trade.

      In other words, no real downside, so I will NOT be using Etrade any more.

  • Mark February 3, 2021, 3:24 pm

    I wonder if this could be used to avoid a wealth tax, because effectively it drops your net worth on paper to zero if you do a margin loan for 100% of your stock value. That’s really risky, so it depends on how wealth would be calculated across an entire year. If you borrow 50%, you’d still have somewhat of a cushion and be cutting your wealth tax in half (again, depending on implementation details)…

    • Mark February 3, 2021, 3:30 pm

      Maybe the non-hypothetical version of this is assets during a divorce or for qualifying your student children for financial aid, since having a large net worth can negatively affect you in both instances. I’m not advocating for this, just curious if it would work.

    • Joe February 3, 2021, 3:30 pm

      There is no reduction in wealth unless you spend the loan on non asset purchases i.e. consumption items like rent.

      • Mark February 5, 2021, 1:37 pm

        SMH – Yes – good point – because you’d still have the cash!

  • GermanExpat February 4, 2021, 4:20 am

    This was described a couple years ago in a medium article. I opened a while ago an IB account to have another source for emergency funds.
    As others already mentioned make sure you understand how margin loans work because margin requirements can change (smaller risk with index funds but larger risks with stocks like GME). Also if the market goes down you can be called as well. IB is known to sell without allowing you to fix the issue (by e.g. adding money).

    Here is the medium article:


  • German Expat February 4, 2021, 5:14 am

    Another side notes, I have a IKBR Lite account with no monthly fees. The margin rates are 1% higher but no monthly fees compared to the rates you show with IKBR Pro. IKBR Pro has a fee of 10$ per month (minus trading commissions but if you are a buy and hold investors those are negligible).

    Also you do need to apply for a margin account / margin trading and fill out their form (not hard, you can do it online) and it takes a bit to get approved (mine was within 24 hours).

    In general great broker, didn’t like the interview their CEO gave around the whole Gamestock issue and them blocking regular customers buying more. All those restrictions are lifted now but left a bit a sour taste.

  • TK February 4, 2021, 10:04 am

    Did you consider loaning the cash to your friend so you would only have one buy/sell transaction. I think this would avoid additional unnecessary transfer taxes(while these are super low in CO, but readers should be warned that they are much higher other states) and escrow fees. Your friend could refi to pay you back or you could hold the note and really become a bank.

  • Mark February 4, 2021, 12:30 pm

    Application in purgatory..

    Applied online on Monday for a trust account. Trust certification uploaded, ACATS initiated, bank ACH set up and funded and the account is still pending approval. Tried online chat, phone, just left waiting for hours with no help. Very very frustrating but can’t pass up the low margin rates. Anyone else having same issue?

  • Anna February 4, 2021, 4:10 pm

    “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?”

    I know you’re having fun and kinda joking here. We’d all like to have control over who our neighbors are and only live near people just like us, but your dream sounds a lot like redlining, which kept non-white people out of the “best” neighborhoods. But I’m sure you have a diverse group of friends and that wouldn’t be the case here. I hope I’m right!

  • Mike February 4, 2021, 10:09 pm

    Margin debt is hitting new highs. In the past this has coincided with stock market peaks.


  • Sonica February 5, 2021, 10:13 am

    Hi MMM, I was looking to do something similar with purchasing a rental property! I’m new to real estate investing, so I’m probably going to take a year or so to learn the ropes and close on a property. I noticed IB Pro has a recurring fee, so I wouldn’t want to pay it until I actually buy a property. I was wondering if you’d recommend opening a free account now and transferring some investments over (from Vanguard), then switching to Pro when I’m ready to take out a loan. Or should I wait to open an account and go straight to Pro? Thanks!

    • Mr. Money Mustache February 5, 2021, 11:21 am

      Hi Sonica – That seems like a reasonable strategy to potentially get around the initial holding period on the IBKR account. If you do try it, please let us know how well it works!

  • Daniel February 6, 2021, 12:35 pm

    To reinforce those above. MARGIN LOANS ARE FLOATING RATE

    But, there are other types of loans that essentially do the same thing. These go by names like “portfolio loan” ; “asset based loan” ; and “liquidity access line”. These tend to have lower rates.

    Other brokers offering cheep margin (and the like) are M1 Finance, and Morgan Stanly.

    Morgan Stanly even offers FIXED RATE TERM LOANS, backed by stocks.

    Their last flyer had 1-year, 3-, 5-, and 7 year fixed term, interest only or balloon options.
    Rates varied from 2.1% on a 1-year, to 2.9% on the 7 year.

    I’m sure the other bank/brokers can do this.

  • Tammy Lynn Baker February 6, 2021, 4:25 pm

    One very important key item not mentioned here is that if you use the margin loan to purchase a primary residence, the interest is NOT tax-deductible because it must be secured by the home to qualify as mortgage interest. If you purchase the property as an investment, then the interest may be tax deductible but only to the extent you have net investment income.

  • Adam February 7, 2021, 6:05 pm

    As a few people have pointed out above, retirement accounts (IRAs, 401ks, etc) can’t be used as margin collateral. Most FIRE advice is along the lines of “max all of those out before you do anything else”, but isn’t this a strong argument for simply focusing on taxable accounts in order to have flexibility to take advantage of strategies such as this?

    As someone who has maxed out a Roth IRA every year since I turned 20, I’m feeling some pangs of regret. I suppose I could always withdraw the contributions and move them to a taxable account.. (which I am now strongly considering) but that’s not an option for 401k folks.

  • Stephane Boisjoli February 8, 2021, 8:37 am

    A bit amusing nobody mentioned what is probably the biggest risk with loaning money – that it goes sour and you’re left having to collect. Now, with MM’s case, it’s in his name, so the worst would be having to deal with rental laws (if any) in that area. Of course, it things really go sour and property destruction happens… but that’s really unusual.
    More likely is the case where the friend gets laid off, can’t find work, and you’re taking some losses while he lives rent free or something like that. Mortgage rates aren’t that great neither, so I think most people aren’t thinking of this as a money making option anyway.

  • Steve Putnam February 9, 2021, 12:20 pm

    BTW, one doesn’t necessarily have to go thru the IB channel to get good margin rates. I am a platinum customer with E*Trade so I called my personal customer support guy and just threatened to move to IB and they have responded quite nicely. I now pay 1.19% for a margin balance in the $900K range. I was at 1.94% when my balance was about $300K–point is you might be able to save the hassle of moving to IB and waiting 30 days if you carry a big enough stick with your current brokerage.

    • Mr. Money Mustache February 9, 2021, 1:37 pm

      Thanks for sharing Steve! I will update the article to suggest this idea to others – I agree that switching is a hassle and IB customer service is sorta like E-trade: mostly functional but still frustratingly slow at times. The crazy low margin rates were my real incentive, so if Etrade is now competing on that front, it’s great news.

  • Laur February 10, 2021, 8:43 am

    Unfortunately not available in Europe, or at least not according to my IKB reseller. Would have been a nice alternative to my emergency fund.

  • Connor Bryant February 10, 2021, 12:22 pm

    I am looking into a similar strategy called Infinite Banking Concept. The idea is you over-fund a whole life insurance policy and borrow against the cash value to finance purchases. With a mutualized insurance company, you’re able to pay the premiums from the dividends after a few years. Any thoughts on that?

  • Liran Brimer February 10, 2021, 2:15 pm

    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. The 50% requirement is just an initial position opening limitation for the same day of trade, while the maintainance requirement is what you car about when holding the position already.

    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?

  • GingerMustache February 10, 2021, 11:21 pm

    I did something similar with E-trade this year for a stick-build. They offered a lint of credit using my investment account as collateral and it’s been around 2.93% for the last year. The rules on how I’m allowed to use the money on a LOC is different than a margin account, which may be why this rate is less than the one you quoted for E-trade. For example, I’m not allowed to use the funds to purchase more securities or pay down margin.

  • Ellie K February 11, 2021, 7:43 am

    Fascinating article – How I wish someone could translate it into United Kingdom financial speak!

  • CaptainFI February 13, 2021, 9:44 pm

    Very interesting. As a somewhat conservative investor myself (in terms of margin), I had never really considered opening a margin account as a form of emergency fund. The financial landscape is somewhat different here in Australia – but I think it is still possible. I know of one other prominent blogger in Australia who does this (margin as an emergency fund) and I think I will be hitting them up for more information. Congratulations on the purchase and thank you for the information MMM!

  • Lifetap February 14, 2021, 3:14 am

    Now there’s something new 🤔 thanks for sharing!

  • SingapurMonAmour February 14, 2021, 10:19 pm

    I have used Interactive Brokers for several years now, here you are (copy-paste as of Feb 15, 2021) their 6 key warnings from IB when you open a Margin Account:
    – “You can lose more funds than you deposit in the margin account”
    – “IB can force the sale of securities or other assets in your account”
    – “IB can sell your securities or other assets without contacting you”
    – “You are not entitled to choose which securities or futures contracts or other assets in your account(s) are liquidated or sold to meet a margin call”
    – “IB can increase its “house” maintenance margin requirements at any time and is not required to provide you with advance written notice”
    – “If IB chooses to issue a margin call rather than immediately liquidating undermargined positions, you are not entitled to an extension of time on the margin call”

    If you are seriously considering using Margin Loan, RUN YOUR NUMBERS FIRST. It’s straightforwards to simulate your risks once you understand how the rules that govern this instrument. Example of simulation:
    – With a Margin requirement set by IB of 50% (standard if you use the loan for more than a few hours), if you borrow the equivalent to 20% of your portfolio value to invest in the same portfolio, you are not “dead” even with a portfolio value drop of 60%
    – BUT let’s look at this scenario: If, due to market volatility IB decides to increase the margin to 70% and the portfolio value drops to 65%, you would incur in losses equivalent to 62% of your remaining portfolio value. Ouch.
    – In the dot-com scenario above, you could avoid those losses if you add money to your account. How much? The equivalent to 112% of your remaining portfolio value. But you would need to know in advance about the change in IB margin requirements and you would have to have the cash available.

    So run your numbers with your own assumptions. If you plan to take cash out of the account, (e.g. to buy real estate) rather than keeping it in IB to invest, remember to be more conservative. Good luck and good investing.

  • Trey February 15, 2021, 8:10 am

    Has anyone figured out how to transfer from Betterment? Betterment states it uses ACATS but the dropdown doesn’t have betterment as an option on the interactive brokers site.

  • Freedom35 February 18, 2021, 9:23 pm

    If you are holding the mutual fund version (i.e. VTSAX as opposed to VTI), can it still be transferred in kind, or are you out of luck?

    • Mark February 23, 2021, 8:13 pm

      Yes, you can transfer mutual funds in kind over to IBKR. I moved SWTSX from Schwab over to IBKR with no issues.

  • Kevin February 22, 2021, 10:57 am

    Great post! I’m curious how it would play out if you had instead been purchasing the house for yourself, and wished to then take out a mortgage for it (as your primary residence) to pay back your margin loan.

    Would this cause an issue with the bank treating your new mortgage as a “cash out” mortgage at a higher rate, because you essentially already own the home (having paid cash for it using your margin loan) ?

    What would then be the strategy to use your margin loan method to pay cash for a house that you wanted to live in? Thanks.

  • Rakiki February 22, 2021, 6:23 pm

    Here in Canada, margin interest is fully deductible at one’s marginal rate (top rate) if the money is borrowed to invest. Furthermore, Canadian dividends are taxed much lower. Hello arbitrage opportunity! Borrow at 2.75%, get a 40% write off; own stocks that yield say 3.5%, and pay 25% tax on dividends. The cap gains are icing on the cake. Buy, hold and let the dividends cover and slowly pay back the loan. My kids will inherit my shares in 50 years but I plan on never selling them. The margin account is also a source of affordable cash for situations such as the one described my MMM. And it doesn’t show up on the credit report either, which makes sense since it’s secured by assets of higher value than the loan…had to explain that one to the bank.

    • Reade Barber February 22, 2021, 7:45 pm

      Interesting, even better with the IB account rate, and yes I’ve checked as a Canadian you can open an account and get the low rates MMM mentioned, it gets even better. Buy 300k of BCE which pays 6.36%, pay 1.25%, and pay the difference and earn around 3.8% after tax. This would work out to $11k in profit. If the stock grows great. One potential issue is that Trudeau is sure to raise the tax rate on capital gains, but the math would still work out.

  • notimetofish February 23, 2021, 4:39 am

    This is fascinating. Back when I owned a business I set up a large LOC (that I secured with some taxable investments) to prevent me from having to either keep a lot of cash on hand, or having to ever sell stock for the cash, for the short but critical periods I needed a couple months of float to pay contractors and wait on the client check. Rates were higher then (so hard to compare) but even so I’m sure it was not near as good a deal as what you are proposing (I think the rate I was paying was somewhere around the 30 year mortgage rate at the time, so I thought good for a line of credit and my uses were generally so very short term small differences didn’t really matter all that much).

    I can picture using this margin loan strategy for RE expenses when the market is low (to prevent selling low or from alternatively keeping a bunch of cash on hand in order to prevent ever selling low) or whenever I’m trying to keep from recognizing capital gains in a certain year for particular reasons (ACA, FAFSA or whatever). I see you can get periodic withdrawals from it so could just set it up for the monthly expense amount to pay out while being used. Used this way it would obviously be a long time before it would add up to a significant amount risk-wise on the market call end of things, but I guess being a lower amount would get more the 1.5% rate.

    The only real risk I see is I guess I wouldn’t want to be in a situation where it would be a huge hit to pay it all back if need be, because the rates do fluctuate so eventually may not be a good deal, and b/c this seems to be the only company that offers a rate good enough to make this entire strategy a good one, so could always change their offer I assume (at least on new money borrowed, the already borrowed money my rise with the benchmark but I assume they can’t just change the formula itself whenever they wish).

  • Lamont Cranston March 3, 2021, 6:40 am

    My married daughter just made an offer on a foreclosure home. The offer was accepted and they have applied for an FHA loan. But the home needs repairs to get the loan. They are a year early, she’s still has one year of dental school, but the price was right, on the water (important to them). So, I’m thinking about setting this up just in case they need help. Does Vanguard charge a fee to transfer index funds to IB?
    Does IB charge to close an account with them? Can I put money in the Lite account and then on short notice (less than a week) switch to a Pro account and transfer money on margin to my bank?

  • James March 9, 2021, 7:45 pm

    MMM can we get the 2020 budget breakdown soon? Have been looking forward to reading it. Thanks.

  • Derrald March 10, 2021, 12:41 am

    Has anyone figured out whether the “Portfolio Margin” account option is better than the “Margin” account option? It seems that you can borrower a higher % with the portfolio margin option, meaning that the likelihood that IB makes a margin call (or liquidates to cover) is lower. Is that right, anyone tried this?

  • Fuzz March 10, 2021, 4:52 pm

    Looks like your referral link is broken.

  • Schmel Jones March 11, 2021, 10:25 am

    Hi MMM,

    Nice post – after buying a house with my wife last year, I started using this strategy to simultaneously build an after-tax portfolio and pay down mortgage to de-risk our path to FIRE through reduced expenses.

    However I ran into one caveat that I didn’t see addressed in this post: preferential dividend treatment DISAPPEARS when you buy on margin. This is true even if you borrow against your holding since IBKR treats them the same. If you examine your statements, you will see your VTI dividends accumulate as “payments in lieu of dividend” which will be treated as ordinary income on your 1099. For me as a mid career earner, that amounts for a decent shift in marginal tax rates.

    Since realizing that issue and also realizing that money is fungible, I’ve split my after-tax investment 50:50 between paying down the mortgage and IBKR, where I’m running a put-selling strategy at 1x leverage against a 100% stock portfolio. This requires margin but NOT a margin loan, so I’m not incurring any margin interest but still have the same overall stock/mortgage exposure as the previous margin loan strategy, with somewhat better risk-adjusted return due to the reduced volatility of the put selling and no margin interest.

    Of course, this strategy won’t work for your purposes since you have large holdings and need cash (and I agree with the logic of your post!). Just pointing out the dividend issue and providing an alternative way of using a margin account for those earlier in the FIRE process.

    • Mr. Money Mustache March 11, 2021, 9:17 pm

      Hmm, interesting point SJ and thanks for sharing it.

      So, would the non-preferential dividends only apply to the portion of your shares that are margined or bought on margin? Sorta like how you only lose rent on the properties you have flipped over to mortgage in Monopoly? Or does one dollar of margin blow your whole portfolio? (which would be pretty irrational tax treatment)

      • Schmel Jones March 12, 2021, 1:28 pm

        Definitely just the portion on margin. I had a negative cash balance of 25% against 4 equally weighted vanguard ETFs that all went ex-dividend in June last year. 2 ETFs posted as ordinary dividends but the dividends from the other 2 ETFs were roughly split between “payments in lieu” and “ordinary dividends”. After doing my taxes this year, those were the only “payments in lieu” that were classified as ordinary income on the 1099.

        Good luck figuring out how IBKR would divvy them up though, not to mention how to control “which” of your holdings are margin…

  • Sonya March 11, 2021, 8:54 pm

    Hey Mr. Money Mustache!
    Enjoyed your take on Margin. I have used my margin for a lot of my investments. It’s using money to make money and a great strategy.

    Question for you though:
    You pull out 400k or 260+ to buy a house in cash. At some point you have to pay this margin down. I get that you don’t want to sell your profits or pay capital gains, etc. All of that makes sense. But at some point you have to pay down the margin, unless you just want to keep borrowing against your portfolio and hope that the market doesn’t turn and your are forced to sell at an inopportune time.

    SO – QUESTION: How and when do you pay it down? Do you have a particular strategy in making sure you don’t get overextended in your borrowing? Or do you set rules up for yourself?

    Thank you in advance. Love your articles and your very informal, personal style of communication.

  • Robert Capps March 23, 2021, 12:05 pm

    Just want to clarify that these loans are at a “tiered” rate – which is briefly mentioned above in the cart but not really elaborated on. So borrowing $400k, on the rate chart shown above, actually results in a 1.215% interest rate as the first $100k is at 1.59% and the next $300k at 1.09%. Still a great deal, but not as great as it initially sounded . . .

  • Nate March 24, 2021, 7:08 pm

    I set up a margin loan at Merrill Lynch that I planned to use for flipping houses, when I read the fine print, they have the option to revoke the loan at any time for any reason. Needless to say I have never used it. I cannot image someone taking out a loan that can be pulled out from under you at any time! I hope IBRK doesn’t have anything like that.

  • Adam C March 26, 2021, 1:14 pm

    The same tool can work well here in the UK too – my margin loan is just over 1% p.a. in US Dollars but I can borrow in British Pounds too, and as well as being cheap, you can repay (partially or fully) whenever you want if you have excess cash (to save unnecessary interest cost) and draw it again whenever you need it at 0-1 days notice. As the article says, the trick is to keep your actual and maximum borrowing low relative to the value of your portfolio securing it. For me, I set the maximum of my borrowing at about 45% of the value of my portfolio and, on average, aim to keep the actual borrowing at about 25-30% of the value of the portfolio. That way (a) I have spare capacity to get cash if I want it at short notice for an opportunity and (b) the risk of the bank coming and asking for extra margin is greatly minimised/eliminated in practice. Watch out – the bank actually offered/pushed me to allow higher borrowing but I refused. The other thing to of course watch out for is rising interest rates as margin loans are priced off of current short term interest rates – not likely to move up until about 2023 (if you believe the Fed, which I do) but still, keep an eye on it.

  • Srinath March 29, 2021, 10:02 am


    This is a great resource for me. I have always wanted to put my savings into an index fund, but the uncertainty of knowing when I need liquidity prevented me from investing. The low interest margin loan is an eye opening opportunity for me.

    I had 2 questions for you:
    a) IBKR Pro requires a minimum activity period (vs. IBKR Lite). What strategies do you use to keep the activity up esp if you have all your money in an index fund.
    b) Say I want to take a loan of $400k, I’d need to hold a margin account of at least $1M+ (to maintain the 25% to 50% ratio). While I don’t have that money in an index fund, I do have some RSUs. The stock however fluctuates in value +/- 5% on any given day. Is it too risky for me to move my RSUs to IBKR?

  • Qmavam April 27, 2021, 9:08 am

    Were the funds you moved in a taxable account or a non-taxable account?
    Does it matter?

  • Calvin May 5, 2021, 1:51 am

    Was exploring this for a windfall like scenario (e.g. 100k inheritance/home proceeds). Couple things discovered when looking into this as a LoC/HELOC-like tool for bolstering access to cash (rather than investing more on margin):

    – The Portfolio margin account opens w/ 110k but practically speaking should be notably higher for anyone considering: The 100k number is at which point IB Pro will disable additional margin access if positions dip below 100k, and also at which point $10/m fee for IB Pro account kicks in. Assuming simple VTI holdings and rough risk tolerance of covid like crash (35%), you’d want to be opening the account with an excess of 135k, I’d say 150k175k is practical number you’d want to have before considering opening IB Pro Portfolio margin account. There is also IB Lite accounts with much lighter limits, more on that below.

    – On that note, Portfolio Margin accounts (IB Pro) are specifically looser regulations than RegT (IB Lite) accounts. The automatic liquidation policy of IB moves this closer to a loaded shotgun on the shelf. In essence, RegT accounts follow specific ratios/percentages set forth in RegT. Portfolio Margin Accounts follow a nightly updated risk-based model that can be enable more margin but also greater losses – should your Portfolio Margin account hold volatile/speculative/meme stocks, you may get unexpected shotgun blast during an earthquake… err, rather WallStreetBets taking your beloved childhood stock position you held for years into a 100% margin requirement, potentially triggering liquidation event. Its understood margin loans are risky, but one risk is market collapse/no confidence event + defined percentages of margin requirement that you can be somewhat okay hedging against, the other is some nightly guru (the OCC) calculated such and such stocks are now way more risky and require higher margins. IB does state that Portfolio Margin accounts can be more restrictive than regular RegT accounts, depending on your portfolio holdings. The point is: The goal posts are updated every single night by OCC (and even throughout the day by IB) and you can get wiped out in a very narrow black swan event (that isn’t civilization ending as we know it).

    – Which takes me to IB Lite: From a margin loan rate perspective (~2.5% at time of writing) not bad, and monthly fees also appear to be $0/m. Benefits apparently include some of the more attractive rates for the speculative side of things (contracts, options, futures, etc) which I don’t personally have interest in (looking for easier/better HELOC type offering). There are 2 drawbacks though: 1. IB’s policy is automatic margin loan liquidation – even with RegT this is closer to the flame for my taste. 2. IB’s UI/interface/platform is said to be lacking in polish and while a simple purchase of a ETF might be easy enough, the platform as a whole is said to be closer to the more advanced graphing calculators of investing world. Which brings me to the competition:

    – New kids on the block: M1 and Robinhood. I don’t have great opinions on either due to news/incidents over the years, but if we are talking discount brokers/rates then might as well point out some competition. How these compare: Robinhood has 2.5% w/ $5/m membership, M1 2% with $125/annual membership (M1 does 3.5% on their non-subscription accounts). Perhaps more importantly, its my understanding both these platforms do actual margin call/maintenance call rather than automatic liquidation events. Additionally, its said these providers have slick apps that aren’t advanced graphing calculator interfaces – this might be exceptionally relevant in a world where email and phone calls have fallen to the wayside, a notification on the phone may tell you something quicker than your email client may poll.

    Clearly the ideal want for this HELOC like margin loan tool is Vanguard w/ competitive ~2.5% rate, but I get it; with full staffed service/brokerage they gotta make the money somewhere. Discount broker IB Pro/Lite offers nice rates but I really struggle with the auto liquidation policy (even if its supposed to be rare and only liquidate 4x of dipped margin gap). New kids on the block match IB Lite rates, built web 3.0/mobile first, and have the highest incentive to automating all common customer service functions. Looks like Robinhood edges out M1 with lower cost, has maintenance calls rather than immediate auto liquidation, likely more mature automated platform, and monthly subscription that can be turned on for the months you need the margin. If you are a diehard index fund Vanguarder, it seems Robinhood is the less worse option discount margin loan broker. Thoughts/Opinions/Experiences?

  • KevinN May 7, 2021, 8:56 am

    Thanks for the useful article. So I followed your referral link and opened an account making several deposits total of 16k. My question is that when will the “award shares” show up in my account anytime during the first year? Or Interactive Broker will calculate the deposits balance during first year and deposit the award shares on anniversary date? Thanks

    • Mr. Money Mustache May 9, 2021, 7:41 am

      Good question Kevin – the quick answer everything happens at the one-year anniversary. But so far, I think IB’s referral program is very lacking in user visibility. It may be working just fine in the background, but there should definitely be a user dashboard so everybody can see their status in the program at any time.

      I put a ticket in with their software development team several months ago and they agreed it is something they are going to implement. But I expect it will be slow – any team that would create such a program without launching a dashboard alongside it is obviously pretty scrambled.

  • Lou Lamoureux June 11, 2021, 1:27 pm

    I’ve been with Interactive Brokers since 2015, I want to warn your readers that they are AGGRESSIVE with protecting their asses, they will TIGHTEN their margin requirements at the drop of a hat (suddenly much closer to your limit than you were expecting), they charge a daily fee if you get close to the limit, and they will sell your positions out from under you before you can do it yourself. Happened to me in the 2018 downturn. Combined with service outages during extreme market conditions it’s best to be conservative with your margin position. But otherwise this is a sound strategy.


  • James Messick July 22, 2021, 2:48 pm

    Now you’ll find out if you have friends that are as good as your neighbors! 6 months in, how is it working out? What did it end up costing you in closing costs, inspections, etc? Are you a landlord or have you already sold to your friends?

    • Mr. Money Mustache July 24, 2021, 1:22 pm

      It has been wonderful, thanks! We have created the super fun cooperative community living situation that my friends and I always dreamed of. Lots of joint projects and dinners and such. Very profitable for us both, as well. Closing costs were about $1000 total.

  • JJ August 4, 2021, 10:55 am

    Hi MMM, thanks for the great article. I have been studying margin loans for a while and read a good amount of things about it, and your article really helped. I opened a new IBKR Pro account recently with your referral link.

  • Marc August 11, 2021, 2:01 pm

    Thank you Mr. MM for the great post – it was very timely for me. And thanks to the many, many of you for offering food for thought and other explanations of the risk. I found it very educational. What I didn’t see addressed anywhere was the cost of moving existing investments (e.g., VTI shares) into an IBKR account. Is there a onetime cost of doing that? Some small percentage “tax” that’s ongoing? Surely VTI profits more by keeping you, their customer as a primary interface over handing it over to IBKR? In other words, do I get the same yield from my VTI fund at the end of the year when IBKR has it that I would get if it were still just a VTI fund directly? I feel like there’s got to be some (small?) cost here that I didn’t see addressed and don’t understand. Thanks!

    • Mr. Money Mustache August 11, 2021, 3:24 pm

      Nope, the good news is that there are typically low or zero costs to do a transfer like this, it is a non-taxable event, and the underlying funds or shares don’t even know you have transferred them to a new custodian, so the returns are unaffected.

      To address your specific example, VTI is an exchange-traded fund that happens to be managed by Vanguard. Regardless of where you buy and hold these shares of VTI (Interactive, Etrade, Schwab, directly on Vanguard, heck even Robinhood) the return will be the same. The brokerages make their money by charging you a small commission per-trade, as well as by charging a markup on things like margin loans.


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