The pledged-securities mortgage explained
Most buyers in the market for a home can expect to need a 20% downpayment, which represents a significant amount of money in today’s real estate market. But even if they have the funds in their bank or investment accounts, they may not want to use them – and they may not have to if they have an investment portfolio.
Savvy investors can leverage their assets to secure a loan using a pledged-securities mortgage. This type of nontraditional mortgage can be advantageous for high-income borrowers, offering them more flexibility and leading to both short- and long-term savings.
With traditional mortgages, the house itself serves as collateral for the loan and the client uses a cash downpayment to bring the loan-to-value (LTV) to an acceptable range for the lender and avoid having to pay private mortgage insurance (PMI). A pledged-securities mortgage (PSM) uses assets like stocks, bonds and mutual funds as collateral along with the property. The borrower pledges assets toward the mortgage loan in lieu of using a cash downpayment by pledging the assets to the lender.
For example, if a borrower wants to buy a $400,000 home, they may be required to make a downpayment of $80,000. But if the buyer has stock and other investments that meet the minimum to cover an $80,000 downpayment value, they can pledge those securities to the lender instead of paying cash. Once the debt is fully satisfied, the lender releases the pledge of assets.
A PSM offers several benefits. Among them:
- The homebuyer is able to secure a mortgage without a downpayment.
- They’re available on a variety of loan terms.
- The homebuyer can avoid making a large downpayment.
- It can eliminate the need for PMI.
- The investor doesn’t disrupt their long-term investment strategy.
- It avoids the potential capital gains tax that may come with liquidating assets for real estate transactions.
- It provides a way for investors to support a family member by pledging their assets to help their loved one buy a home rather than providing them with a gift for a downpayment.
There are, however, a few potential drawbacks with this type of mortgage. For example, if the value of the borrower’s assets decreases, the lender may ask for additional funds. The borrower may also have limited trading abilities if the pledged securities are mutual funds or stocks.
Other downsides to note are that even though the borrower has eliminated or reduced the down payment, they will still pay interest on the full price of the home, and if they default on the loan, they could lose both the home and their assets.
PSMs can also be used to help a family member secure a mortgage. Keep in mind, however, that if the family member defaults on a loan you helped secure with a PSM, you could be at risk of losing those assets.
This type of mortgage may be best suited for high-income borrowers. Because the borrower retains ownership of the pledged asset, they must continue to report and pay taxes on any earnings, but they won’t be placed into a higher tax bracket.
Talk to your financial adviser to learn more about pledged-securities mortgages and find out if it’s a suitable strategy for you.
Sources: Investopedia, American Financing, Realtor.com
Lending Services provided by Raymond James Bank, member FDIC, NMLS ID #405712, affiliated with Raymond James Financial Services and Raymond James & Associates, Inc., Raymond James & Associates, Inc., and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.
The Pledged Securities Mortgage is not suitable for everyone. The proceeds from a Pledged Securities Mortgage cannot be (a) used to purchase or carry securities; (b) deposited into a Raymond James investment or trust account; (c) used to purchase any product issued or brokered through an affiliate of Raymond James, including insurance; or (d) otherwise used for the benefit of, or transferred to, an affiliate of Raymond James. Raymond James Bank does not accept RJF stock or any securities of Raymond James as pledged securities towards a Pledged Securities Mortgage. A loan client may be at risk of losing money in their collateral account due to market volatility. This may require the deposit of additional equity into the collateral account, which could result in further losses. Though Raymond James Bank will typically contact the client or their Financial Advisor prior to liquidating pledged assets, Raymond James Bank reserves the right to sell pledged assets of its choosing without contacting the client, if needed to maintain equity in the collateral account. If a loan client defaults (stops making monthly payments) on their mortgage, they could lose both their house and the securities they have pledged.
