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Lombard loans: your questions answered

Lombard loans are an option few individuals take up, and yet they typically offer an opportunity for people to borrow that can be much easier and cheaper to set up, risks notwithstanding. Colin Campbell explains.
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Published 1 December
7 mins

Simply put, Lombard loans are those that are taken out when borrowing against diversified investment portfolios. One of the attractions of these types of loans is that investors are still able to retain ownership and authority of their investment portfolio. While there are restrictions on the type of investments clients might make (e.g. AIM stocks are not acceptable security), as well as the ability to divest, clients can benefit from any future performance gains, while simultaneously opening up a range of other financial opportunities.

This type of finance was pioneered by the Lombards, a community who conquered Italy in the 6th century and settled in Lombardy. At the time, this region covered most of Italy (apart from the Papal estates around Rome), before being scaled back to northern Italy.

The Lombards’ heyday came at a time when Christians believed it was a sin to profit from money that hadn’t been earned through work, but this did not apply if one was dealing with someone of another faith. It also wasn’t technically a sin if the re-purchase price of the asset, held as the loan’s collateral, happened to be at a higher value than that of the loan. By the 16th century, this style of banking was prevalent across Europe, with cities establishing a Lombard Street on which these businesses were based. London’s Lombard Street was gifted to goldsmiths from Lombardy sometime after 1290 by Edward I.

While the banking sector has moved on, the name stuck and Lombard loans continue to be called upon. Meanwhile, in a recent webinar, we discussed the power of borrowing within a wealth plan, and this prompted a number of questions about these types of loans, which we aim to answer here.

1. What are people using Lombard loans for?

We find there are a variety of reasons – an entrepreneur’s business needs, a family emergency or, perhaps, another unforeseen event that requires immediate access to cash. This is the case even if it is likely that the loan will be paid down relatively quickly, such as through the receipt of an insurance claim or annual bonus. We have also provided Lombard loans to enable parents to loan or gift to their children, to help them buy a home, for example, without needing to sell their investments. Clients have also used them to fund the purchase of homes where it is difficult or expensive to get finances on the property itself, e.g. for second homes abroad.

2. What investments can back these loans?

In today’s world of finance, these loans are available when the portfolio in question is one of diversified, high quality and ‘liquid’ investments that are priced and traded on a daily basis. They allow investors to borrow against both discretionary investment management services and execution-only investment portfolios held with a bank.

We can also lend against non-diversified portfolios, for example, against a single blue-chip holding that a client might have, for instance with share options accumulated during their employment. While this is not Lombard Lending per se, it can allow a client liquidity for many reasons, including to diversify their holdings and build a portfolio.

3. Can you borrow against investments held in ISAs and personal pensions?

It is not possible to borrow against investments held in ISAs for regulatory reasons. A self-invested personal pension (SIPP) is itself able to borrow (up to 50% of its net value), but this will depend on the scheme administrator and the purpose of the loan and, as such, is also not a vehicle or wrapper that we could provide Lombard loans to.

In practice, the majority of Lombard lending is secured against a borrower’s ‘general’ investment account, i.e. investments not held in a tax-efficient wrapper.

4. Can Lombard lending be combined with property finance?

Yes, and while a Lombard loan can be much easier and cheaper to set up than one using property as security, there are often circumstances where clients take out both types of finance.

A Lombard loan alone would avoid the need for a surveyor to conduct a valuation, as well as the additional conveyancing fees that typically accrue for a loan secured against property. Although we would encourage all buyers to have a building survey carried out when buying any property.

At the same time, they can be used to fund renovations that will increase a property’s future value, but where this uplift isn’t reflected in the current valuation and is limiting the level of borrowing achievable against the property itself. Also, Lombard lending is invariably swifter and more cost-effective than securing a bridging loan.

Where a loan is being used primarily for the purpose of purchasing a rental property, it may be possible to claim tax relief on some or all of the interest applied on the loan, as we covered in our latest webinar on UK property tax.

5. How much can I borrow and how much will it cost?

We typically lend up to 50% of the current market value of a diversified portfolio. This gives us plenty of scope to ensure that a portfolio’s volatility does not force a difficult conversation, where we would either need to have some of the loan repaid or have additional security provided.

In terms of costs, the loan margin depends on a variety of factors and we may also charge an arrangement fee. Lombard lending facilities typically tend to be cheaper than the equivalent loan secured against property.

6. What other assets can be used as security?

Lombard loans are backed by high quality, diversified and liquid investment portfolios only. If you’re borrowing against a yacht, a classic car or a piece of art, as examples, these require asset-backed lending facilities. It’s a specialist form of financing we don’t provide at Nedbank Private Wealth, not least as the market for many of these assets is extremely subjective. In addition, loans such as these often require the asset itself to be taken as security and, in some cases, such as art, held in storage until the loan is repaid, which would typically add additional costs to the loan. Alternatively, there can be restrictions placed on the collateral’s usage, meaning the enjoyment of your asset could be curtailed.

7. What happens if my underlying assets fall in value?

When taking out a Lombard loan, you should always keep the risks in mind, particularly when using the proceeds to buy additional investments (whether these are shares, funds or physical property). Leverage and flexible financing are a double-edged sword, not least as asset prices can go either way. While it might not be envisaged at the outset that a diversified portfolio would fall significantly in value, it can and does happen from time to time – a point that was reinforced in March this year.

Anyone looking to borrow should be aware of the risks and ramifications of this happening, and only borrow if they are comfortable with these. In practice, this might mean either applying for a smaller loan to allow greater ‘headroom’, having additional assets in place to be able reduce the loan, or providing additional collateral, or a combination of these.

8. What other risks are there?

It is also worth bearing in mind the impact of taxes on your investment and how this compares to the ‘hurdle rate’ of your investment. For example, if the interest rate on the loan were, say, 2% per annum, then for our typical UK-based client who pays the additional rate of income tax, the hurdle or break-even rate on their investment would need to be 4% per annum. In many cases, it is not possible to deduct one’s financing costs from the investment returns for tax purposes.

Finally, it is important to ensure you have sufficient income to service the loan, this is particularly pertinent in a world of falling investment returns, dividends and property yields.

Whether you are about to borrow for a specific purpose in the near future, or are planning for something that might be 12 to 18 months – or more – down the line, it is always a good approach to discuss lending options in advance with your professional advisers, including your private banker. Taking a proactive approach will give you, as a prospective borrower, the most valuable commodity of all – time. And the period can be used to consider the options available to you and find the best, most efficient and suitable way forward.

Clients can borrow against a UK, Isle of Man or Channel Island-based residence, be it a home or an investment property. We also lend against investment portfolios, and loans can be denominated in Sterling, Euros or US Dollars. With clients in 160 countries, we often help clients based outside the UK, and have lent using the same approach across market cycles since 1987.

 

To find out more about Nedbank Private Wealth’s bespoke lending services, please contact your private banker directly or call our client services team on +44 (0)1624 645000. Or you can get in touch using the links to the forms towards the end of this page.

If you fail to keep up loan repayments, your home used to secure the loan may be repossessed. Any examples of products and services are for illustrative purposes only and do not constitute an invitation inducement, advice or a personal recommendation. Nedbank Private Wealth does not provide tax advice, and instead works with tax advisers to ensure clients receive the appropriate advice. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

about the author

Colin Campbell

Colin Campbell

Colin joined Nedbank Private Wealth’s London office in 2010 after 15 years with Barclays, working within its retail, commercial and wealth management divisions. He acts as a trusted adviser to a select group of high-net-worth clients, which includes private individuals, professional intermediaries, companies and trusts. Colin provides his clients with a tailored and holistic private banking service, offering integrated banking, lending, investment management and fiduciary services.

 

He is a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.

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