Adding a SBLOC as part of your personal financial strategy

I first wrote about this unique banking solution as we were ending 2020, and even today in my conversations with private banking clients, the topic of emergency cash reserves still comes up frequently.

Many executives, professionals, and other affluent individuals are taking a different approach to their personal “rainy day” funds, which are typically used to supplement any loss or disruption in their personal income stream, or to take advantage of an unexpected opportunity.

Most people are familiar with the rule-of-thumb of having six-months of living expenses on hand. But even among the affluent, it’s very rare in my experience to see that level of reserves actually held in cash in bank accounts. In most cases, clients prefer to have excess cash invested rather than in lower-rate bank savings or money-market accounts.

Many individuals often identify their taxable investment accounts as a secondary source of cash for unexpected needs or opportunities. They figure they can sell positions in their account to quickly raise cash if needed. But what if that cash need comes at an inopportune time to sell?

To avoid the need to sell (and possibly create a taxable event) consider a line of credit with securities in a non-qualified investment account as the collateral. These “Securities-Based Lines of Credit” (SBLOCs) allow borrowers to “stay invested”—including maintaining trading ability—even while drawing on the line. Furthermore, the access to cash is truly immediate, as there’s no need to wait for trade settlement.

Recently, I was meeting with private banking client who was signing documents for a new line of credit. He said, “I can’t believe we didn’t take advantage of this sooner. In the past, we’ve had to sell from our investment account as we’ve had needs for additional cash, and we’ve been missing out on the future returns from those funds we liquidated.”

Securities-backed line of credit vs. home equity line of credit

A securities-backed line of credit has much in common with the more familiar home equity line of credit (HELOC). Both can be used for almost any purpose. Among the more common uses are living expenses (in the event of income interruption), real estate investments, home renovations and college expenses.

Like a HELOC, an SBLOC gives people the option to borrow only as needed. Both provide flexible monthly repayment terms and competitive interest rates.

In years past, HELOCs had an advantage in the form of favorable tax treatment since borrowers could deduct interest payments from their income taxes. However, HELOCs lost that advantage (with some exceptions) in the 2017 tax reform. Now the two types of credit lines are on a more level playing field.

Note that with both SBLOCs and HELOCs, there is a risk of needing to pay down borrowed principal in the event of a severe market decline, as happened with both securities and home values during the Great Financial Crisis of 2008.

The following table provides and overview of HELOCs and SBLOCs together with a third type of credit line commonly used for emergency cash purposes—an unsecured line of credit.

Typical characteristics of three credit-based sources of emergency cash

Unsecured/Reserve Line of Credit+ Home Equity Line of Credit (HELOC)+ Securities-Based Line of Credit (SBLOC)+
Collateral None Mortgage placed on personal residence Pledge placed on investment account (non-qualified)
Interest Rate Floating—much higher than HELOC or SBLOC Floating—lower and competitive Floating—lower and competitive
Credit Limit Smaller (<$25,000) Typically up to 80% of the available equity in a personal residence Typically up to 70% of marketable securities' value in a taxable investment account
Time to Establish Quick Longer (weeks)—appraisal, title and flood certification can slow process Quick

Many individuals are generally familiar with unsecured lines and HELOCs—but keep a securities-backed line of credit in mind. It might be the best strategy available, to not only provide access to immediate cash but also to keep you on track to meet your retirement goals.

As with any financial decision, deciding which—if any—of these is appropriate to meet your current and future needs is a process of evaluating the size of the need, your risk tolerance, and other individual factors. It’s important to discuss these options with your banker and come up with the solution that will be most beneficial to you. 

Not FDIC insured, not guaranteed by the bank, not a deposit, may go down in value, not insured by any federal government agency   

Equal Housing Lender

+Subject to credit approval.

Let me know how I can help! Contact me today.

Ron Jahnke

Ron Jahnke

Vice President - Private Banking Officer
(262) 522-7405
NMLS #: 777858