A fairly new facility now available from some financial service providers is called Investment Backed Lending. In simple terms, it allows you to borrow money using your existing investments as security, rather than having to sell them.
No Cashflow Strain
Here’s how it works: if you hold investments on a provider’s platform, they will advance you a loan based on the value of those investments. Typically, you can borrow up to 50% of your portfolio value. The loan runs for 12 months at an interest rate usually around prime, and you only need to pay the interest. The capital itself never has to be repaid unless you choose to. Even better, the interest can be settled as a balloon payment at the end of the term, which means no monthly cashflow strain.
Why might this be useful, especially if you’re already in retirement?
Quick access to cash:
Perhaps you want to buy a car or a property and don’t want the hassle of applying for traditional finance.
Avoid selling in a slump:
If markets are down, you may prefer to borrow short-term cash rather than disinvest at low values.
Reduce tax drag:
Holding large cash balances often leads to extra tax and little to no real growth. With this facility, you can keep your money invested while still having liquidity.
Local or offshore:
These loans can be set up against both South African and offshore portfolios.
The key benefit is that your money stays invested and keeps working for you. You don’t trigger capital gains tax or transaction costs, and you keep the growth potential intact.
Naturally, there are limits and safeguards. Loans are capped at a percentage of your portfolio, and if markets fall sharply, you could face what’s called a margin call—where the provider asks you to top up your security or reduce the loan. So while it’s a useful facility, it still needs to be used wisely and in the right circumstances.
For many clients, though, Investment Backed Lending is a smart way to access short-term cash while keeping their long-term plans on track. It’s not for every situation, but it’s good to know the option exists.
Dirk Groeneveld, Certified Financial Planner
t. 083 261 9287
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Previous Columns:
- How Many Good Summers Do You Have Left?
- Retire With A Plan. Then Tear It Up.
- It May Be Time to Reconsider What Retirement Means to You
- We Love A Sale, Except When Investing
- The difference between saving and investing
- Where is our focus?
Read more on Salute Your Own Self at Client Care
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