How I used margin lending to buy a home
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[Originally written December 2021 on the Hatch forum]
I‘ve been posting here a few times about my portfolio and I’m just finishing up a major rebalancing that unfortunately will see most of my portfolio leave hatch, So I wanted to share some info about that, because it’s been a challenging journey to figure out myself.
So prior to last week, I had about 60% of my shares with ASB securities and about 30% shares with Hatch. Before the recent stock market adjustment, this was a portfolio well above 6 figures.
My partner and I have been thinking about buying a new house, however the struggle has been that due to my self-employment, I don’t qualify for much lending, and in the eyes of banks, my stock portfolio is valued at $0. I also haven’t wanted to sell my position, however, because I still see so much upside with TSLA in the near term.
So the decision has been whether to sell, whether to hold, and how to fund.
In the meantime, a house has come up that we wanted to buy, so we went ahead and bought it. To help fund this purchase, I have transferred my current portfolio to Interactive Brokers (IBKR), as they allow margin lending.
Margin lending is basically if you have $500 worth of shares, a margin lender will allow you to borrow some amount of $ against that position. IKBR allows you to borrow up to 50%, so that means you can borrow at most, $250, as long as your position is above $500. If your position ever drops below $500, then IBKR will sell your position until you are above that 50% mark, or sell your entire position, pay back the loan, and see the remainder in your account. The downside of this is just that usually, your position would only drop in a market (or stock) downturn, which is usually the worst time to sell.
So this means you never want to borrow up to that 50%, it’s usually ‘‘safer’’ to borrow an amount that assumes that even with a percentage drop (say 20%), you won’t get margin called. I do need to point out here that margin accounts come with a LOT of risk, and if you are reading this article as a way to learn about margin, you are probably not ready to try margin yet. Your journey has just begun, padwan.
We are not borrowing the full amount of the house on margin (I don’t have that much TSLA stock!) but just enough to bridge the gap between what the bank would lend us, and what the house cost us.
I did my initial math on my TSLA margin call assuming that the stock could drop to $800 per share before I got margin called. So as long as that doesn’t happen, I don’t have to sell a share. Now that I’m transferring my Hatch total, TSLA can drop to $550 before I get margin called.
The other benefit of borrowing from IBKR is the interest rate. Their current rate is 1%.
Heaps of people will probably tell me it’s mad to buy a house with margin lending, and I’ve had heaps of people tell me over the past 4 years that I should sell my TSLA shares and take some profit. So far my high risk / high reward strategy has worked, and survivorship bias or not, I’m going to stick with it.
I still think that Hatch is an excellent product and service, and I still have a portfolio of about $70k which will remain there. Margin lending can be a fantastic way to leverage your stock portfolio better, however it does come with a lot more risk. With traditional stock ownership, it doesn’t matter what the stock price is, so regardless of a recession, war or disaster, your stock will still belong to you, and if the market does return to ‘normal’, then in theory so will your stock. This is not true if you have margin lending.
The great risk is that there could be a short-term market impact that drops below your margin limit, resulting in your stock getting sold, and if this happens in conjunction with the stock market returning to normal, you will have less shares than you did prior. As with any investment decision, you need to understand and be comfortable with the risks for yourself.
