I'm looking to build a new home and don't want to sell stock to do it. Interactive Brokers (IB) margin rates are 1.57% on the first $100k and 1.07% on the next $900k. I currently pay 2.875% on my mortgage and would expect to pay more on a new loan in particular if it was a construction loan. A Schwab Pledged Asset Line seems to be over 3.5% (1-month LIBOR plus 3.4+%). I expect to borrow around $400k for the new home. Why wouldn't I just transfer ~$1.2 million worth of stock into an IB account and use margin to pay for the new home? (For tax purposes I would be taking separate cash out and using the margin to pay for the stocks). I understand there is market risk and if the stock portfolio fell below $600k (?) I would risk a margin call. I would use mid and large cap US stocks and ETFs that presumably have low margin requirements (long holdings, no shorts, no options, etc.). I also understand there is margin rate risk that the margin rate could go up over what I could get in a traditional mortgage. I don't believe the fed funds rate is going up to 2.5%+ in my time frame of the next 5 years. Also, I will likely sell my current home once the new one is complete (within 6-12 months of starting construction/initiating the margin loan) and could use the money from that to pay off the margin loan if rates go up. They mention a $10 minimum trade commissions per month but a.) that's trivial compared to the interest savings b.) based on their fees I might do that anyway and c.) that seems to be waived for accounts over $100k. Will they throw me out if I just let the account sit there and just make a trade or two each month? Are there other costs/risks to the IB accounts or margin loans I'm not accounting for? ​Are there better alternatives I should be considering? Where better would be still sub-2% interest rate but with lower interest rate risk or market risk and without paying high closing costs or points. I'm willing to put up as much as $1.5 million in equities and the house worth $600k as collateral.
You can do this if you are confident of the risks. If the construction loan is non-recourse that might have some value. Just a fixed vs floating rate bet compared to getting a bank loan. Tax implications may be different.
I think you will lose your mortgage interest deduction if you itemize 400k is around a 16k deduction in year 1 x your current tax bracket
With that much capital you could be getting 7 to 1 portfolio margin at IB, meaning that you will likely have to suffer significantly more than a 50% draw down before you incur a margin call. It is safe to assume that in the event of a big market crash, a risk is to what extent IB changes their margin requirements on certain securities, although if you just buy SPY, this doesn't seem like a huge risk. Tax implications are relatively neutral given margin interest expense also deductible from investment income, as is mortgage interest expense if you choose to itemize. However, I do not like this idea as you are basically betting that interest rates stay low. You can buy treasuries to achieve the same view. Your 2.8% mortgage rate is based on the market expectations of interest rates over the next 5 years or whatever, plus some spread. The IB margin rate is based on the short term interest rate plus some spread. If you believe the fed funds rate won't change for the next 5 years (a prediction that even the best professionals cannot make with any certainty), there are better ways to make that bet.
stupid question-how exactly you are going to borrow from IB? let say you have 1M portfolio of stocks. then what?
Then IB just lets me withdraw $400k in cash and starts charging me margin interest. In theory I could sell $400k of stock, withdraw the money, then buy back the same $400k of stock "on margin". I assume I don't have to do this as far as IB is concerned - but may have to do it for IRS tracing rules if I want the margin interest to be deductible/offset gains as an investment expense? I'd rather not sell in order to avoid capital gains but even if I skip the deduction it makes more sense to take the IB margin loan over a tax deductible 3-5% mortgage. I may be overly optimistic in terms of the fed funds rate staying low for years but presumably this still makes sense as a 6-12 month construction loan? Construction loans seem to have higher rates and additional fees than a 30-year mortgage whereas this seems to be much lower rate and zero fees - assuming IB doesn't have some other fees or issues I'm not considering?
Yes, I think it could makes sense for a short term construction loan. You can easily hedge out the risk of a market crash by buying deep out of the money puts. Puts that require a 50% drop in the SPY to be in the money that expire one year from now only cost you 0.12%. Maybe you can make 2% on the interest spread. Obviously this is assuming doing this doesn't completely mess up your asset allocation by making you much more exposed to equities when you shouldn't be.
============ As far as probabilities; you could probably do that. But this bull market is[r] really ,[r],really old; its still a [r]risk. Whats your selling point??What if it panic sell$ into a bear market?????????????; What if it simply downtrend$ into a bear market???????.Actually IB, like most all brokers has a good bit of discretion when it comes to margin calls................................................................................. I have had a nice home debt free; nothing like it.No mortgage tax deduction comes close to that[math wise, or risk wise.. ]Cash markets can be a better deal, in many ways.Wisdom is profitable to direct.May or may not be able to sell REALTY in 6 months . I wish you well .
Sounds like you've thought this thru already. I don't think you'd need to sell stock to form a paper trail for the tax deduction. If you wire $400k from IB to your bank then later wire the $400k to your escrow company, that should be an adequate paper trail. Or better yet, wire the money straight from IB to escrow. For a 1-3 year loan, this makes sense. Even if rates climb to 2.5% as people expect, you're no worse off than the other forms of mortgage financing available