What is a securities-backed line of credit (SBLOC)?
A securities-backed line of credit is a way to get cash for your needs in the near term, guaranteed by your investments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). You don’t have to sell those securities. Depending on the firm that holds your investment accounts, you may be able to borrow money equivalent to 50% to 95% of your assets’ value.
An SBLOC works similarly to another kind of line of credit you might be familiar with: a home equity line of credit (HELOC). That gives a homeowner access to cash using equity in the property to guarantee the loan—without having to sell the house. If a borrower doesn’t pay back the lender according to the loan terms, the lender can seize and sell their house. With a securities-backed line of credit, a borrower could lose their investments if they don’t make their payments.
Advantages of a securities-backed line of credit
The benefits of an SBLOC include the following:
- You stay invested. Because you haven’t sold your investments, your securities retain the potential to grow. You’re also entitled to any dividends or interest your investments make.
- By the same reasoning, you avoid capital gains if those investments increase in value. If your investments’ value drops, your losses aren’t locked in. You still own the investments, which could recover and earn additional gains in time.
- You choose which eligible accounts to pledge, or designate, to back your SBLOC.
- The approval process can be quick. For example, at Fidelity, if you’re approved for a securities-backed line of credit, you generally can access money from your loan within a week.
- Interest rates on a securities-backed line of credit are generally more attractive than those on a bank loan or credit card. The lender might not run a credit check; instead, your loan amount could be based on the value of your investments.
- Money can be used for a variety of purposes, such as a house purchase, home renovation, tax payment, or business need.
- There might not be any fees. Fidelity, for instance, doesn’t charge application fees, origination fees, annual fees, or prepayment penalty fees.
- You can draw from an SBLOC whenever you need because the line of credit remains open. A HELOC, on the other hand, is only available to draw from for a set amount of time.
- You choose the principal repayment schedule. Once you draw on the securities-backed line of credit, you’ll be required to make monthly interest-only payments, but you can pay back the principal on a schedule you determine.
- You can use the credit line only as you need, so you can withdraw some of it, all of it, or none of it over the draw period—you decide.
- You don’t have to make payments until you draw on the loan.
Disadvantages of a securities-backed line of credit
There are some important downsides to understand if you’re considering an SBLOC:
- You may need a minimum portfolio value to qualify for a securities-backed line of credit. In general, your assets’ market value should be at least $100,000.1
- Because you’re using securities as collateral, you could lose them if you default on the loan.
- Interest rates fluctuate, which could have a positive or negative effect on how much you'll owe depending on the direction rates move. This is different from a mortgage that offers a fixed interest rate over the duration of your loan.
- The value of your assets may fluctuate depending on market conditions, and your credit limit may drop in response, unless you add more accounts as collateral or repay the loan. If you don’t do either, your securities may be sold to make up for the loss in collateral. That selloff could trigger capital gains taxes if your investments grew since the time you acquired them.
What are securities-backed line of credit rates?
SBLOC rates vary from firm to firm. At Fidelity, for example, rates have 2 components: a fixed rate (aka the spread) and a variable rate, which means the overall rate changes from month to month. The fixed part of the rate is generally determined by how much in investments you hold at the brokerage. The variable part of the rate is based on the Secured Overnight Financing Rate (SOFR), a rate influenced by the Federal Reserve that reflects the cost of borrowing overnight, and is typically 2 to 3 percentage points higher than that number.
In general, the larger the credit line, the lower the fixed part of the interest rate. No matter your rate, you’re charged monthly interest only on what you’ve withdrawn, not the entire amount of the line of credit. When you do withdraw on the line of credit, you're borrowing money and will be charged interest until the loan is repaid.
Considerations when taking out a securities-backed line of credit
Before you seek out an SBLOC, consider the following:
Different brokerage firms require different minimum amounts of assets under management
This means that accounts you can pledge must be worth a certain minimum, no matter how much your line of credit is. Your brokerage firm can tell you what accounts you can pledge and how you can meet the minimum.
Brokerage firms may require a minimum line of credit amount
Let’s say you only need $50,000, but the brokerage firm’s minimum line of credit amount is $100,000. You’d have to get a line of credit for $100,000, but it wouldn’t mean you’d be required to withdraw the entire $100,000. You pay interest on and must repay only what you do withdraw, which in this case would be $50,000.
Brokerage firms may disable certain features of accounts you pledge
Your brokerage firm will tell you whether you’re allowed to withdraw assets from pledged accounts and what you’re allowed to do with those accounts. If your pledged assets can no longer support the line of credit, the brokerage firm may require you to pledge more collateral or else may sell some of your securities.
Can I move to a new firm if I have an SBLOC?
It’s not as easy to move your assets to a new firm if they’re pledged as collateral for an SBLOC. To move, you’ll likely have to pay off the loan.
To learn more about how to apply for and access a securities-backed line of credit at Fidelity, make an appointment to speak to a Fidelity representative or your Fidelity financial advisor.