Every week for the past 14 months, the wealth advisor Aaron Bell has had to help his affluent clients buy houses.
Many of them aren't buying for themselves but for their adult children. It's common in the US for parents to help their children buy their first home, with 43% of millennial homeowners in a 2018 Legal & General survey saying they received financial assistance from their family. But the affluent and wealthy, with savvy advisors, are able to make all-cash offers by borrowing against their investment portfolios — and save on taxes in the process.
With interest rates on loans as low as 2%, clients can save money by taking out loans they don't need, rather than liquidating their stock and incurring hefty capital-gains taxes.
"We're coming off of a 13-year bull-market run," Bell, an advisor at Cannataro Family Capital Partners, a Northwestern Mutual firm, told Insider. "Every parent should pause before selling stock to buy the house."
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The housing market has turbocharged borrowing against securities
Securities-based lines of credit (SBLOCs) have been popular for years thanks to low interest rates, but the fever pitch of the real-estate market has made them crucial.
"What we're seeing now is most people have to go in with cash offers and be willing to close within 30 days," Jason Field, a financial advisor at the boutique firm Van Leeuwen & Co., told Insider. "These type of SBLOC loans are quick because you don't have to go through all the underwriting a mortgage would entail because you're using your account value as the collateral."
You don't have to be ultrawealthy to take out a securities-based line of credit, but they can be taken out only against nonretirement assets and typically have a higher minimum than margin loans, which, unlike SBLOCs, can be used to buy stock. Larger lines of credit also typically incur lower interest rates.
The largest savings come from avoiding capital-gains taxes
In high-tax states such as California, where total federal and state capital-gains taxes amount to nearly 40% for top earners, taking a loan instead of liquidating securities is a no-brainer, Charity Falls, head of wealth planning at Union Bank, said.
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In Falls' experience, parents typically keep the property title in their own name and ultimately gift it to the child directly or in a trust.
The estate-tax exemption is $11.7 million, which means fewer than 2,000 US families have to worry about it, but there is a way to lower the value of their estate using these loans, Falls told Insider. If a parent sells the property, or any asset, to a child, and the child gives them a promissory note in return — a legal document promising the borrower will pay back a loan — the child effectively takes on the original loan, and the estate includes only the remaining debt when the parents die, and not the property itself.
For most clients, it is used to save on income tax, rather than estate tax.
"This can be used by everyone as an income tax planning strategy," she said.
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Banks are leaning into this trend
GS Select, a division of Goldman Sachs' private bank, has issued more than $8 billion in loans this year, with real estate accounting for half of the volume, according to division cohead Whit Magruder. Parents pledging their investment accounts with their child as the borrower is a tax-efficient way to pass along assets before death.
"It's one way to start the wealth transfer between generations," he told Insider.
BNY Mellon Wealth Management and Merrill Lynch both offer clients 100% financing with cash and marketable securities, as well as the property as collateral.
Through Merrill Lynch's Parent Power program, clients can pledge up to $5 million of securities on behalf of their adult children or a close relative. They can use the loan to pay for a home in cash and then take a mortgage later. The child is the borrower and repays the balance of the mortgage unless their income is too low to qualify.
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With JPMorgan's pledged asset-mortgage product, clients don't have to pay private mortgage insurance — which is required when buyers make down payments less than 20% of the home's purchase price — or make a down payment. These lines are also secured by the value of the property, which means that as it appreciates, the adult child's dependence on their parents' assets decreases.
"As the value of the house grows, the reliance on the parents' portfolio goes down, and, ultimately," the liquid assets "could be released," Vince La Padula, the global head of lending solutions for wealth management at JPMorgan Private Bank, told Insider.
The loans do come with strings attached
Clients can generally trade within their account assets while they have a loan out against them, but transferring out cash or securities has to be approved by the lender. If the value of the portfolio dips, clients may be asked to either pay off a portion of the loan or add more money to their account.
According to Bell, brokers will typically come calling if your pledged assets dip by no less than 25%, and if the value dips below the loan value, you may have only 30 days to pay it off before your account is sold and you are charged for any outstanding difference.
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While market swings of this size are rare, Bell does recommend some clients hedge their bets by taking loans in combination with selling off assets to make big purchases.
"It's hard to imagine the market will stay at these highs forever and ever," Bell said. "Take the win. We can't just be greedy pigs."
