Private banks and wealth managers offer a huge range of financial solutions for affluent investors, ranging from the familiar products and services a High Street bank might include, through to more esoteric ones designed solely for High Net Worth Individuals. Lombard lending is one such offering that might hold particular benefits for the wealthy.
A Lombard loan is a loan granted by an institution to a client which is secured against some or all of the marketable securities that person holds, i.e. their investment portfolio (therefore, Self-Invested Personal Pensions are not applicable).
Crucially, a Lombard loan allows the client to retain ownership of their portfolio, and so keep benefitting from any performance gains, while simultaneously opening up a range of other financial opportunities. Such loans meet the need for cash without delay without requiring the client to divest their assets; they also do not require treasured assets like cars or artworks to be used as security as asset-backed lending facilities do.
As such, Lombard loans may be the most simple, convenient, cost-effective option for those needing to increase their financial flexibility.
What’s more, Lombard lending is far more accessible than might be assumed, with investment portfolios of £250,000 eligible at a number of wealth managers.
As many as one in ten of the HNWIs coming to findaWEALTHMANAGER.com are seeking private client lending facilities, and this can be for a whole range of purposes.
Often our users have short-term liquidity needs that a Lombard loan can fulfil in a better way than traditional credit routes; the very great speed with which credit may be granted when an institution hold a client’s investment portfolio in a custody account means that property purchases are a common scenario.
In other cases, investors are seeking to diversify their investment portfolios efficiently without selling their existing holdings or to use leverage to “gear up” return potential. Meanwhile, more sophisticated investors might want to use their current portfolio to seek higher investment returns through derivatives like foreign exchange forwards and options or interest rate swaps (here, the Lombard loan can provide the required security margin to allow the investment to be placed).
One of the main draws of wealth management offerings is the level of tailoring possible and Lombard lending can be customised to meet any number of credit requirements. Fixed-term, fixed interest rate loans, current account overdrafts and “standby letters of credit” to allow for very large outlays are all among the options offered by institutions, helping investors to fulfil a wide range of personal – and entrepreneurial – needs.
Importantly, a Lombard loan can be very much easier than using property as security on a loan, as in the latter case a bank would need a formal valuation to take place and additional legal fees may accrue for its arrangement. Lombard lending is invariably swifter than securing a bridging loan.
As one of our users with an £8m portfolio told findaWEALTHMANAGER.com:
Lombard lending is a very good way to access money on a cheap, flexible basis, and I’ve found it really useful for house purchasing and investing in companies at early stage.
Part of this flexibility is that money can be made available on very short notice: the better arrangements are essentially standing and are available on 24-hour drawdown.
Institutions will typically lend up to 60% of a portfolio’s value, this having been assessed by their credit team (they will usually ask that the portfolio is quite well diversified to reduce the risk to institution).
However, as wealth managers on our panel point out, here again private clients benefit from a great deal of flexibility: their loan won’t necessarily be “called in” at an inopportune time just because the loan-to-value ratio has been breached. What happens instead is that portfolio balances are tracked and when the set loan-to-value ratio is exceeded then that triggers a conversation with the client. It might simply be the case that they need to add to their investment portfolio or pay down some of the loan to bring the loan-to-value ratio back into line.
Flexibility being one of the main features of Lombard loans, the terms will vary, but investors can expect to pay LIBOR (the inter-bank lending rate) plus 1.25-4%. This means that rates may be very favourable indeed compared to other routes.
An arrangement fee may also be applicable, which may be fixed or in the region of up to 0.5% of the loan value. However, it is possible that the institution may be happy to waive this in order to secure your business.
How can you get the best deal on a Lombard loan?
Importantly, a Lombard loan does not necessarily have to come directly via the firm managing your investments, nor even the institution holding your assets in custody if your investment manager custodies them elsewhere. It is possible for lending to be offered by an entirely different third-party under a “letter of undertaking” issued by the custodian certifying your assets.
This opens up opportunities for you negotiate on the lending terms quite aggressively, particularly given that a third firm might be very keen to make a favourable impression on potential clients. There may also be preferred partnerships in place so that wealth managers can secure the deals that precisely suit their clients’ needs.
In essence, private client lending is a particularly competitive area and you should always push to secure the best lending provisions possible. As ever, the larger your investable wealth the more you can leverage your position with the wealth managers vying for your business.
However, as our £8m investor pointed out, you must also ensure that a lending facility really will be as convenient as you need, especially if it is for private equity or property purchase purposes. “It should be a case of one signature, on one form, via email,” he said. “From experience I would warn people against ‘wet signature’ scenarios where you have to print and post documents and so experience a delay of possibly ten days.”
There are many institutions which can help if you have an investment portfolio (or indeed another business or property asset) you would like to borrow against.
To meet your best-matched providers use our smart online tool specifying that lending is a facility of interest to you. Or, if you would like to discuss your situation with our straight-talking team, please do get in touch here.