Lombard loan or property loan: how to borrow without disinvesting


The lombard loan is aimed at well-informed wealth profiles photo credit: GettyImages

The Lombard loan allows an individual or a company to take a loan from a bank in exchange for the pledge of financial assets. It can then be shares or bonds. The Lombard loan rate is fixed, its duration is from one to four years and its amount depends on the value and risk level of the assets pledged. Very flexible, the lombard loan allows the borrower to develop their assets, while remaining the owner of the assets offered as collateral. From a tax point of view, it also has some advantages.

Summary:

  • Lombard credit: definition and principle

  • The three forms of Lombard credit (patrimonial credit)

  • How much can you borrow with a Lombard loan?

  • The Lombard loan remains a fixed-rate loan

  • Develop your assets by reducing your taxation thanks to the Lombard loan

  • What are the risks associated with Lombard credit?

Lombard credit: definition and principle

Lombard credit was created in the Middle Ages by merchants from Piedmont and Lombardy in Italy. Also called equity credit, it is a loan granted to an individual or a company in exchange for the pledge of liquid financial assets. It can be shares, bonds, UCITS or a life insurance contract. Clearly, these assets guarantee the cash advance granted by the bank at a fixed rate.

Generally taken for a period of one to four years, the Lombard loan is a “loan”.

at last

“. Therefore, for the entire duration of the loan, the lender only pays the interest. The capital, meanwhile, is repaid at maturity, in one go. In case of total or partial impossibility of repayment, the bank can sell the pledged assets and compensate themselves to the extent of the remaining capital owed.

To remember

Banking establishments generally reserve Lombard credit for their wealthiest and most informed customers.

The three forms of Lombard credit (patrimonial credit)

There are three types of Lombard credit:

  • him

    Term financing:

    is a cash advance for a specified period.

  • Margin Call Funding:

    the raised amount is used to meet margin calls when investing in derivative financial instruments, such as options or rate swaps.

  • The discovery:

    the customer has a cash facility and the amount of the loan is not determined in advance. The interest will depend on the amount actually used.

How much can you borrow with a Lombard loan?

Unlike conventional loans, the maximum amount of a Lombard loan is not directly linked to the borrower’s profile. Indeed, given the mode of operation, it depends on the value of the financial portfolio placed as guarantee and the nature of the assets concerned. The riskier the promised investments (with significant volatility), the lower the loan, and vice versa.

Typically, the bank lends between 40% and 60% of the value of the shares. It also takes into account the sectors of activity concerned and the diversification of the portfolio. In some situations, it can go up to 80%, or even 90% of the value of the bonds, taking into account their evaluation by rating agencies. Finally, the bank can lend up to 100% of the sums held in a fund in euros in the framework of life insurance since it is guaranteed in capital and without risk.

To remember

Not all banks agree to grant Lombardi loans. To get one, it may be necessary to have competition between financial institutions.

The Lombard loan remains a fixed-rate loan

The rate of a Lombard loan is fixed. It is calculated from a reference rate: Euribor. This is the rate at which European banking establishments lend to each other. The bank adds a margin generally between 1% and 1.5% to this fee. As a result, the rates of Lombard loans are often higher than those of traditional loans.

To remember

The bank always sets a flat rate of 0% for its reference rate. It is thus protected from a swing in the reference rate in negative territory.

Develop your assets by reducing your taxation thanks to the Lombard loan

The first advantage of Lombard credit is related to its flexibility. Indeed, the administrative obligations are less restrictive than those required during a conventional credit. For example, loan insurance is not mandatory since the loan is secured by assets. The Lombard loan therefore represents an interesting alternative for the elderly or those with health problems. Also, given its form (credit

at last

with repayment at maturity), there is no monthly savings effort to be made.

Another undeniable asset, the Lombard loan allows you not to “disinvest” your assets. Indeed, the borrower commits to some of his financial investments and therefore remains the owner of his financial assets throughout the duration of the loan. It thus continues to receive income, in the form of dividends or interest.

In addition, the lombard loan provides leverage to boost and diversify its assets. By increasing its debt, the borrower increases its investment capacity and can direct it towards other financial assets or real estate to generate new returns. As a result, Lombard credit is often called “patrimonial credit.”

Finally, the Lombard loan can give advantages in terms of taxation. When the loan is contracted to carry out the acquisition of real estate intended to be rented bare, the interest paid by the loan is then deductible from the income of the property.

To remember

With regard to the Impôt sur la Fortune Immobilière (IFI), the remaining capital owed on a Lombard loan used for the purchase of a taxable property is potentially deductible. In any case, it is recommended to carry out a fictitious amortization over the duration of the loan (or over a period of twenty years if the loan has no term or is renewable every year).

What are the risks associated with Lombard credit?

The collateral value of the securities is subject to regular checks by the bank. When the securities in pledge lose their value, the lending bank can request additional guarantees in the form of securities or repayment of part of the lombard loan. The bank can also do pure and simple liquidation of the securities held.

The leverage effect allowed by Lombard credit is a double-edged sword. Indeed, if this credit offers the possibility of increasing the potential yield of its assets, it also presents the risk of multiplying losses. However, in the event of a sharp drop in the value of the securities or assets purchased through the Lombard loan, the borrower could be unable to find the necessary liquidity to repay the capital at the end of the loan. In this case, you would partially or totally lose ownership of the assets provided as collateral.

Credit Lombardo: how much does a real estate mortgage cost?

As part of a home loan, you can provide the property purchased as collateral to cover the risk of non-repayment of your Lombard loan to the credit institution. This is an agreement with your financial institution. The mortgage must be registered by notarial deed, either in the deed of sale of the property, or in a separate deed. The operation has a cost: when signing the mortgage, the borrower must pay the land registration tax, registration fees for the land registration service and the notary’s remuneration. The general cost is about 2% of the guaranteed amount, or even more for an old property. The release of a mortgage also involves costs and the payment of rights and taxes up to 0.3% to 0.6% of its amount.

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