A pledged asset mortgage offers an alternative way to finance a home purchase by using your investment portfolio as collateral instead of a traditional cash down payment. This loan structure is particularly beneficial for individuals who want to keep their investments intact while still qualifying for a mortgage.
How a Pledged Asset Mortgage Works
Instead of providing a typical cash down payment, you pledge a portion of your investment assets—such as stocks, bonds, or mutual funds—to the lender, who holds these assets in a collateral account. This setup typically enables the lender to offer a higher loan-to-value ratio, often up to 100%, meaning you can buy a home with little or no upfront cash.
Importantly, you keep ownership of your assets and continue to receive dividends or interest. However, you cannot sell or withdraw these assets freely while they are pledged. As you repay your mortgage and build equity, the lender gradually releases your assets back to you.
Benefits and Risks to Consider
This mortgage option helps avoid capital gains taxes since you don’t need to liquidate investments for a down payment. It also often eliminates the need for Private Mortgage Insurance (PMI), a cost typically required when putting less than 20% down on a conventional loan. Learn more about Private Mortgage Insurance (PMI).
However, pledged asset mortgages carry market risk. If the value of your collateral drops significantly, lenders may issue a margin call, requiring you to add more assets or cash. This risk makes it crucial to understand your loan terms and your investments’ volatility. For a detailed explanation, see our guide on Margin Calls.
Who Should Consider a Pledged Asset Mortgage?
These loans are best suited for high-net-worth individuals with sizable, liquid investment portfolios who prefer to maintain their market exposure and avoid taxable events. They are specialized products mainly offered by private banks or wealth management firms, not standard mortgage lenders.
Example Scenario
Suppose Maria wants to purchase a $600,000 home. A traditional 20% down payment would require $120,000 in cash. Maria has $400,000 in investments but wants to avoid capital gains taxes and keep her portfolio invested. With a pledged asset mortgage, she pledges $180,000 of her investments (30% of the home’s price) as collateral.
The lender provides a 100% loan, allowing Maria to buy the home without liquidating assets. Over time, as Maria repays the loan and her home value rises, she gains equity until the lender releases her pledged assets back to her control.
Additional Resources
For a deeper understanding of mortgage types and down payment options, see our articles on Conventional Mortgage and Down Payment.
References
- Investopedia: Pledged Asset Mortgage
- Forbes: What Is A Pledged Asset?
- IRS.gov for general tax guidance on investment sales.
This mortgage type offers a sophisticated option to leverage your investment portfolio for home financing but requires careful consideration of risks and terms. Consulting with financial and mortgage professionals can help determine if it’s right for your situation.