+44 7393 450837
advice@adamfayed.com
Follow on

What is Lombard lending and can you use it as mortgage finance?

What is Lombard lending and can you use it as mortgage finance?

Understanding Lombard lending and its potential for mortgage finance provides insights into successful financial goal setting, especially for high-net-worth individuals seeking diversified financing options.

If you have any questions or want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.

Introduction

As an investor, it pays to know all the different ways you can leverage your assets to make your life easier.

An experienced investor can find that there are a number of different investment classes, resources, and techniques available that they can use to provide for their every need.

Lombard lending is a type of financing that uses assets as security for a loan. It can be a useful way to access short-term funding, but it also has its risks.

Lombard lending is different from a mortgage finance, and should not be considered as such. Lombard lending is usually sold to corporate clients and wealthier individuals whose assets are considered to be valuable by banks and other financial institutions.

The most common use of Lombard loans is for companies in need of liquidity or who have large amounts of cash lying idle.

Lombard lending can be a great tool for your finances
Lombard lending can be a great tool for your finances. | Photo: Pexels

What is Lombard lending?

In northern Italy, there is an area by the name of Lombardy, a region whose Italian banking institutions have a long history that dates to the Middle Ages.

The collateral loans offered by these banks were very well-known and because of this, a similar structure gave way to how we know Lombard loans in the present.

Lombard lending is a type of finance that uses assets as security for a loan.

Lombard lending is usually sold to corporate clients and wealthier individuals whose assets are considered to be valuable by banks and other financial institutions.

The way this works is as simple as any other loan: You sign up with a bank or other lender who will give you money based on your ability financially secure yourself against defaulting on payments over time.

As with any other loan, if you default on a Lombard loan then your security will be liquidated as a means of repaying the debt.

Lombard loans are generally a type of loan that are supported by liquid assets from an investment portfolio. By using your assets as collateral for the loan, the creditor is shielded from risk. Therefore, if you default on the loan, your bank may liquidate the assets to recoup its loss.

Lombard loans are given in exchange for the commitment of marketable items like stocks, bonds, or investment funds. A certain amount of money can be borrowed against the deposited assets.

This loan-to-value ratio will be evaluated on a regular basis and will be based on the kind, currency, quality, volatility, and marketability of the assets in question as well as the diversification of your investments.

Lombard finance is usually used to provide liquidity for specific projects or for financing in the short-term, rather than for long-term objectives.

Typically, Lombard lending uses standard base interest rates from the London Inter-Bank Offered Rate (LIBOR). However, each loan might be different and have different terms depending on the borrower.

As Lombard lending is based on the value of a borrower’s assets, the rates and even payment options will differ on a case-by-case basis. The bank also has the right to have their own policies regarding the handing out of these types of loans.

It is important to note that because lenders have less risk, they frequently provide lower rates than are customary for consumer loans.

Can I use Lombard loans as mortgage finance?

While it is possible to use Lombard finance as mortgage finance, it is unlikely that any mainstream lenders would recommend or even approve this course of action for an individual borrower without many assets.

Lombard lending is typically used for specific projects or for financing in the short-term for wealthy clients, or small or medium companies. It can also be used as a bridge loan when there’s been no other suitable offers from other sources and you need some time before you can raise capital from other sources.

Lombard loans are asset-based loans in essence, and in the event that the borrower falls behind on payments, lenders want highly liquid collateral, such as stocks that are easily convertible into cash.

While it’s true that having an asset as security for a loan helps reduce risk, most lenders do not want their individual customers carrying extra debt on top of their existing mortgage debts – unless that client has enough assets to cover the mortgage already.

In most cases, Lombard loans are used in conjunction with other types of mortgages such as floating rate and fixed rate mortgages.

These types of loans allow you to take advantage of low interest rates while still maintaining some flexibility over your repayments if you need extra money at any point during the term of your mortgage agreement.

It is highly recommended to seek the advice of a financial planner or expert when you are thinking about taking out a mortgage, especially if you are thinking about taking out a loan to pay off other existing debt. A good financial planner can recommend the best course of action for you to meet your goals.

What are the benefits of Lombard lending?

Lombard loans can give you a lot of flexibility in using your own portfolio to meet any financial need, all without liquidating any assets.

Gaps in personal or commercial liquidity can be filled quickly, readily, and affordably, allowing you to, for instance, finance an acquisition or buy a vacation house. Without having to sell your own assets, you can also take advantage of lucrative investment possibilities or broaden the diversification of your portfolio.

In order for these loans to function, the bank must first use your investment as security before disbursing the necessary amounts to you. The advantage of this is that you are still free to spend your investment and funds whenever you see fit.

If you have a sizeable investment portfolio that a bank deems is enough for Lombard lending, you can borrow money against it without selling your holdings or spending any of your assets. You can keep your investments while using the loan to pay off any other outstanding debt.

This means that you might utilize the loan to repay your mortgage without selling any of your stock, for example. Without giving up any of your assets, this is a fantastic method to free up cash.

Lombard loans provide another option to selling investments when you need money quickly. By taking out a loan against the value of your portfolio, you can raise the money you need while safeguarding your own interests.

The money that a financial institution provides through Lombard lending can be utilized for business capital and investing.

Lombard loans are thus a reliable source of short-term liquidity. It could, among other things, help with paying for school expenditures, providing bridge funding to complete a real estate transaction, or paying off tax debts.

Another less common but equally advantageous strategy for astute investors is to borrow money to further diversify an investment portfolio that is heavily weighted toward stocks, bonds, and investment funds. Taking on debt in order to secure investments may seem unusual to some individuals, but if done wisely, the profits might be substantial.

This practice is commonplace in the realm of business. To meet regular cash flow needs, many firms must secure asset-based loans or lines of credit similar to Lombard lending.

For instance, a company might take up loans to ensure that it can pay its payroll costs even if there is a small delay in the cash it anticipates receiving.

The lender may offer to grant a Lombard loan with the borrower’s physical assets as collateral if the applicant company cannot demonstrate sufficient cash flow or cash assets to cover the loan. For instance, a brand-new restaurant might be able to get a loan only by pledging its equipment.

The most prevalent asset-based borrowers are small and mid-sized businesses that are reliable and have tangible assets with value.

Even major firms occasionally look for asset-based loans to meet their immediate financial demands. It can be too expensive and time-consuming to issue more shares or bonds on the capital markets.

The need for funds can be urgent, as in the case of a significant acquisition or an unanticipated equipment purchase.

In such cases, the liquidity that Lombard lending and other asset-based lending can provide is a valuable tool.

Consider carefully before you use Lombard loans to refinance debt
Consider carefully before you use Lombard loans to refinance debt. | Photo: Pexels

What are the considerations when using Lombard lending?

Lombard lending can be a great source of liquidity if you know what you’re doing, but it needs to be carefully structured to meet your needs.

First of all, using Lombard lending is the same as using any other lending service. It entails your consent to the duty to pay back a predetermined sum on a predetermined day in the future.

Lombard lending’s costs will vary depending on the amount you borrow, the value of the collateral, and the loan’s term, and any early or late repayment may result in additional fees.

It should also be noted that Lombard loans are not available to anyone. Lombard lending is typically only offered as a resource for wealthy, high net worth individuals or companies with a sizeable portfolio of liquid assets. A minimum loan amount may also be set by some lenders.

Always keep in mind your financial capabilities and the assets available to you when using them as collateral to for Lombard lending.

Typically, you would want your assets’ market value to be worth more than the loan’s principal. This will act as a buffer against price swings.

With a Lombard loan, you will have access to a credit line based on the performance and worth of your pledged assets.

You can change this credit line at any time to suit your needs, whether they be for a cash loan, a warranty, or to pay for derivative trades. As long as the Lombard loan is paid off, you can also access the pledged property whenever you choose.

There are a great number of scenarios that can benefit from Lombard lending’s many potential applications. However, it’s crucial to be aware of both the advantages and the risks.

If you think your borrowing charges will be less than the anticipated return on the collateral you have deposited, that should be the only time you should consider getting a Lombard loan.

You should also remember that the amount of credit you can use will depend on your ability to pay back loans, cover interest payments, and cover any top-up calls.

Your Lombard loan strategy will need to be continuously evaluated in light of your stated investment goals and, if necessary, revised and adjusted to take into account the most recent market developments.

Take note that the loan-to-value ratio that was used when your loan was authorized will be reassessed at regular intervals by the bank you borrowed from.

This means that you will either need to submit more assets as collateral or reduce the outstanding loan by the appropriate amount if the securities kept in your safekeeping account lose value or their loan-to-value ratios are changed.

Lombard lending comes with your agreement to giving the bank the right to change the structure of your portfolio or liquidate the assets you put up as security if you don’t pay your obligations on time.

Also remember that any open trade that is closed prior to maturity may incur additional unwinding expenses for which you will be liable.

In the worst cases, you can still be left with a loan debt due to the bank even after all of your pledged assets have been sold.

It is highly advised that you seek thorough financial guidance from a trusted financial planner or expert to make sure your desired borrowing needs align with your investment goals and that the Lombard loan meets your requirements.

The main benefit of using Lombard lending as mortgage finance is that you can get access to liquidity quickly and easily. However, you should always remember the risks and drawbacks such as potential expenses when your assets depreciate.

It’s crucial that you always do your homework before making a financial decision such as taking out a loan. There are always choices available to you as an investor, so before making any rash action, be certain you know which one is ideal for your personal circumstances and your financial goals.

Pained by financial indecision? Want to invest with Adam?

smile beige jacket 4 1024x604 1

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

This website is not designed for American resident readers, or for people from any country where buying investments or distributing such information is illegal. This website is not a solicitation to invest, nor tax, legal, financial or investment advice. We only deal with investors who are expats or high-net-worth/self-certified  individuals, on a non-solicitation basis. Not for the retail market.

SUBSCRIBE TO ADAM FAYED JOIN COUNTLESS HIGH NET WORTH SUBSCRIBERS

SUBSCRIBE TO ADAM FAYED JOIN COUNTLESS HIGH NET WORTH SUBSCRIBERS

Gain free access to Adam’s two expat books.

Gain free access to Adam’s two expat books.

Get more strategies every week on how to be more productive with your finances.