The Wire: Winter 2021 – Case study – how portfolio lending can be a low-cost and effective option for some clients

(Estimated read time 5 minutes)

Case study – how portfolio lending can be a low-cost and effective option for some clients

When clients approach a financial planner looking to borrow money to buy a home, the easy option may just be to turn to a traditional mortgage lender to find acceptable terms.

However, lending secured against a portfolio of assets – sometimes called “Lombard lending” – can be an excellent option for clients. 

Here’s how I helped married lawyers to buy their dream home without the need for a mortgage.

Getting a full picture of our clients’ needs

I met two married lawyers, one of who was a high earner at a “Magic Circle” law firm. They have two young, pre-primary aged children.

Firstly, I reviewed their portfolio at a “Red Carpet” bank. They held £5 million in total: £2 million wrapped in pensions and ISAs, plus £3 million in a General Investment Account (GIA). This was all held in one unit trust that was both expensive and an average performer.

Their goal was to move from the trendy part of London where they lived to the leafy suburbs. They had found a dream home for £5 million, near to good schools for their two children.

The net proceeds from the sale of their home were £3.5 million. Their cash could cover the large Stamp Duty bill and the associated costs. It would also leave some money for a modest refurbishment and a decent-sized emergency fund.

So, the clients needed to borrow £1.5 million to complete the purchase of their new home.

Flexibility was the key, and a competitive rate

The clients’ excess net income meant that they could clear any debt very quickly, so this meant their priority was “total flexibility”.

Their banker had suggested a “cheque book mortgage” at an interest rate of 1.9%, or a five-year fixed rate at 1.49% with a 0.5% fee. However, this fixed rate didn’t allow lump sum repayments and so didn’t tick the clients’ “flexibility” box.

As markets were volatile and the value of the clients’ portfolio had fallen, they didn’t want to crystallise that position. Indeed, they were also considering further additions to their investments.

My independent advice was to consider restructuring their portfolio with a better suited investment house that was more appropriate from an investment and risk perspective. 

In addition, having considered all the pros and cons, borrowing against the portfolio was also the best advice.

The clients borrowed £1.5 million secured against the £3 million GIA with no fees whatsoever and an interest rate of just 1%. In addition, they have the complete flexibility to repay some or all of this loan whenever they want.

Substantial cost savings and better investment performance

In simple terms, the 0.5% fee and 0.9% interest rate saving equated to more than £20,000 in just the first year. And, having completed the initial “settling down” review, the clients are delighted, as the entire portfolio is not only up but significantly, and has outperformed their old bank by 4% after all costs.

To be clear, the clients are sophisticated enough to understand the total absence of any certainty. 

However, they are investing for 15 to 20 years before they draw down and the initial “loan-to-value” for the portfolio borrowing at 50% (£1.5 million secured on £3 million) would mean that only a market meltdown would lead to a margin call. 

As the clients said, as corporate lawyers that would then be the least of their worries!