Traditionally, when investors want to borrow money for a real estate purchase or business opportunity, they first consider conventional lenders. However, with interest rates higher than they have been in many years and the S&P 500 index delivering double-digit returns year to date, more investors are looking to their portfolios to generate liquidity.
But wait — they’re not looking to sell their investments. Rather, they are borrowing against them by pledging portfolio assets as collateral for a securities-backed line of credit. On paper, this provides liquidity without selling investments. In reality, the investor is borrowing against potentially volatile assets.
Let’s say an investor has a concentrated position in XYZ stock. Selling the shares would trigger a significant capital gain, but the investor still believes the stock has room to grow. Some large custodians allow investors to borrow against taxable investment accounts through a revolving line of credit secured by the portfolio.
Such loans generally have a variable interest rate and may require monthly interest payments, though they often lack a traditional repayment schedule. The maximum borrowing amount varies based on the value and type of collateral.
Assume the investor’s brokerage account is worth around $1.5 million and is predominantly concentrated in XYZ stock. Depending on the eligible collateral and its concentration, the custodian assigns a borrowing value to the portfolio. A lender likely will not treat an account invested almost entirely in one stock the same as a broadly diversified portfolio. In this scenario, the investor wants to borrow $750,000, or about 50% of the portfolio’s value, which falls within the borrowing limit.
The investor is purchasing land and building a home but isn’t yet in a position to sell their current home. The securities-backed line of credit can bridge that liquidity need until the investor is ready to sell. The interest rate may be competitive with other borrowing options, and borrowing itself does not require the investor to realize capital gains by selling the stock. Once the investor sells the old home, the proceeds can be used to repay the loan.
It almost sounds like a win-win. But sentiment can turn on a dime, and a market decline can leave pledged assets below the value necessary to support the line of credit. When this happens, the lender may issue a maintenance call, requiring the investor to deposit more cash, pledge additional assets, repay part or all of the loan, or permit the lender to sell pledged shares. Often, action must be taken within a very tight window.
If pledged shares are sold — or the investor needs to tap tax-deferred accounts to satisfy the maintenance call — the investor could face an unexpected tax liability, possible penalties, and a disrupted financial plan.
In certain circumstances, a securities-backed line of credit can be a viable solution for a short-term liquidity need, but carries substantial risk and is not appropriate for every investor. It does not eliminate investment risk or potential tax consequences. Instead, the strategy adds debt, variable interest rate risk, and the possibility that someone else may ultimately determine when pledged investments are sold.
Before pledging a brokerage account for liquidity, investors should work with their financial adviser to determine whether borrowing may be more appropriate than selling and, just as importantly, what the plan will be if the pledged investments fall 20%, 40%, or even 60%.
If you have questions about securities-backed lines of credit and whether it is an appropriate strategy for you, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the August 8, 2026 “Henssler Money Talks” episode.
Disclosure: This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products. |