Lombard loans sit among an array of financing options that wealthy borrowers can tap into to suit their individual financial profile and circumstances.
As with standard mortgages, these loans are offered by banks and financial institutions and come with favourable interest rates but, instead of a property, the debt is secured against investments.
Lombard loans are a niche product offered at the top end of the borrowing market.
Lenders provide funds to high net worth individuals who are able to put up a certain level of securities as collateral.
In many ways, the arrangement works in the same way as a standard consumer loan, but with some key differences.
Lombard loans are a cheap, flexible and fast form of borrowing.
It is usually quicker to access a Lombard loan than a mortgage because the lender doesn’t need to go through the process of valuing a property.
The loans can form a part of a mortgage arrangement, but may also be used to take advantage of an investment opportunity where time is of the essence. Borrowers can typically access Lombard loans as a lump sum in a matter of days and sometimes in as little as 24 hours.
Another option is to set up a lending facility, similar to a current account, where the loan costs nothing unless it is drawn down; the credit line is essentially on standby until the funding is needed.
The speed offered by these funding lines means they are often used to secure investment properties where a buyer needs to act quickly – for example, when competing against cash buyers.
In the current climate where uncertainty and volatility are part of market conditions, Lombard lending provides crucial levels of flexibility. The loans are particularly useful to high net worth borrowers because they create liquidity without having to sell the underlying investments. It means people who are asset rich but have low levels of cash or liquidity are able to make full use of their wealth when buying a property.
At the same time, individuals don’t have to relinquish long-term investment strategies or deal with tax implications of liquidating portfolios in order to generate required funds. The borrower will also continue to receive any dividends or voting rights associated with the assets.
Furthermore, leveraging a portfolio can help with diversification, and potentially enhance returns on the same underlying capital by allowing investors to ‘gear up’. Borrowers can also alter the structure of their investment portfolio when they need to.
Lombard lending is a relatively short-term form of borrowing with terms ranging from as little as one week up to 24 months. Financial institutions will usually offer the loans as a percentage of the value of the securities held by the borrower.
However, the investments or assets the borrower pledges to the lender must be easily liquidated.
Lombard loans can typically be accessed by individuals with investment portfolios of at least £100,000 – lenders may also stipulate a minimum loan amount.
Stocks, shares and bonds are among the most common types of securities accepted, but some life insurance policies with a surrender value may also be considered. The types of securities usually affect the value of the Lombard loan offered by the lender. However, most loans are offered at around 60 per cent of the value of the securities – this helps buffer against movements in the value of the securities.
Once the loan is agreed the securities will be kept in a custodial account controlled by the lender.
If the assets drop below a certain pre-agreed value, the borrower is likely to be asked to top up based on the agreement set out with the lender. Where a borrower does not, or cannot, provide further securities the lender may sell a portion of the existing assets to reduce the loan. The lender may also exercise this option if a borrower were to fail to make repayments.
Any unwinding costs of the assets before maturity fall to the borrower. If there is still an outstanding loan amount after all pledged assets are sold, the borrower is liable to the bank for this sum.
Asset-backed lending, such as Lombard loans, doesn’t fall under regulation by the Financial Conduct Authority.
Lombard loans are a cheap form of funding compared to standard credit cards or high street and consumer loans, because they are secured against an asset. The rate is usually tied to LIBOR or base rate, plus the bank’s margin to give a typical pay rate of somewhere between 2% and 5%.
In most agreements, the rates offered are completely bespoke and entirely dependent on the risk associated with the deal and the assets being put forward.
Borrowers can also expect to pay an arrangement fee in the region of 0.5%, although it may be less or waived altogether. In some cases, there may be a charge for early repayment of the loan.
UK, European and global private banks are among the lenders that provide Lombard loans, and you usually don’t need to be a customer of the bank to qualify.
Most lenders will have no problem with foreign nationals and those with income coming from international sources. The loans are offered in a range of different currencies and use of the loan is also very flexible. Lombard loans can be provided on an interest-only or capital repayment basis, depending on what suits the borrower.
At Enness, we have relationships with a wide range of lenders that offer Lombard loans and can facilitate these agreements on behalf of clients. We always source the best pricing and terms from the market tailored to the individual circumstances of the customer.