How to Handle Interest Payments on an SBLOC
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- Опубликовано: 22 авг 2024
- SBLOCs are a great tool for building wealth. It is the most popular way to implement the Buy, Borrow, Die tax planning strategy.
SBLOCs allow you to borrow against your portfolio of stocks and bonds. While an SBLOC is technically a loan, it works very differently than other forms of financing. Watch this video to see how interest and principal payments are handled for SBLOCs.
In this video, I cover how interest payments on SBLOCs work. I walk through a few different strategies for how you can make the interest payments.
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Thanks for this. It can be annoying how often people let emotion interfere with their investing and this is one of those areas. The fact is if your money can make better returns invested compared to your interest rate there’s no reason to ever pay down the principal on your SBLOC - as your portfolio grows it will dwindle to a smaller and smaller part of the landscape.
Agree 100%. I couldn't have said it better myself.
@@hooksx Doesn’t that depend on the growth rate in comparison to the interest rate? If you borrowed $100,000 at 2% to buy Nvidia on January 2nd, the shares are worth $180,000 today and you paid about $500 in interest.
Love your content, Sharon! Specifically like when you go over SBLOCs. You have a really great way of explaining a seemingly complicated topic and making it simple. If you were considering doing more SBLOC content, you got my vote 🙋♂️
Thank you for putting this together 😊
Thank you so much! I will note to focus on more SBLOC content in the future.
A quick google search of simply “What brokerages allow sbloc” leads me to a bunch of margin loan content.
What brokerages do you know offer sbloc ?
So you're only paying the interest on the loan but not the principal....correct? I think a whiteboard video would be great visually for this.
Amazing info in the video! I don’t know how you have more subscribers. Growing my portfolio and business to eventually get to the point of taking a SBLOC 📈
Thank you! Best of luck on your business and investments 👍
Thank you for sharing this information Sharon! Very concise and easy to understand!
Just found your channel. I could have avoided some big mistakes if I found this sooner.
Hi Sharon. Can you do a video by giving a practical example with numbers? Would really appreciate.
Also have another question. What happens if you don't pay back the principal and interest? I heard you say you don't have to but also heard if its close to margin call then to pay it off? Something I'm confused about
Great content and thanks for answering my question from an earlier post you did about whether or not you could/should put sbloc money in a money market account.
Thanks for watching!
Thank you for your video! I am super new to this strategy as I am someone who always despised interest (Dave Ramsey person). I am now using SBLOCs to accelerate my taxable dividend growth portfolio and budgeting in 1% principal payoffs each month to not over extend. Feels like I have a mini rental property. Thanks again for all your knowledge!
Glad it was helpful! Thanks for watching!
@@hooksxI invest in qualified dividends, so I pay 15% tax on dividends received up to $519k per year. If I ever choose to FIRE and stop working I would have zero tax on the first $47k in dividends not including writing off SBLOC interest. I chose a dividend growth strategy to create cash flow today to mitigate risk on each holding as well as have capital appreciation. I am not buying REITs with this money, I am buying dividend paying ETFs/stocks with at least a 8% CAGR and a long term track record increasing dividends. This strategy works in both bear and bull markets. Bull market I have more SBLOC margin to invest and in a bear markets I can compound my shares cheaper increasing my dividend yield on cost. So your opinion on it making no sense is just that, an opinion.
How does your brokerage account - in which you're doing SBLOC, options, margin, etc - interact with your Roth IRA? Thank you so much for sharing your knowledge!
You wouldn't do an SBLOC with a Roth account. You would do it through a regular taxable account.
Hi Sharon, Is it a good idea to use SBLOC money to buy a primary residence property as opposed to regular mortgage?
GREAT VIDEO!!!
Appreciate the kind words :)
New subscriber here and love your video products. Very informative and realistic to real life situation.
Appreciate the kind words! 😁
Came across your channel and love the content! This may be a reach but do you also have an understanding of how these strategies (specifically SBLOCs) may differ in the UK?
Thank you for your kind words! I do not know for certain about any UK specific rules here. However, I know some lenders have different terms and requirements for UK residents in some cases.
I will be listening carefully for the difference between local bank SBLOCs and brokerage firm margin accounts
Very cool video. Thanks.
Thank you!
If you never pay down the loan balance and then you die…does the balance transfer to your kids? Who becomes responsible for the outstanding loan balance?
Depends on how you set up your estate. There is the ability to have the shares sold and loan paid off or have the loan/strategy remain outstanding. Whoever owns the shares would become responsible for the loan if it remains outstanding.
Hi Sharon - I'm a new subscriber, and I love your content. Well researched and great perspectives that go deeper than other channels! I'm thinking about opening an account with Interactive Brokers based on a previous video. Do you have a referral link or anything that might give you a bonus for suggesting people?
Thank you for asking - really appreciate that! I don't have a referral link. I generally try to stay away from affiliate income and only use affiliate arrangements in very limited situations. Trying to build up trust with my audience and remove any incentives to recommend something that I don't think is the absolute best.
@@sharonwinsmith Totally understand and respect that decision to try to be transparent and unbiased! In this case, I'm going to sign up regardless, so if you want to get a referral link where it's mutually beneficial, please send. However, no pressure at all since it seems like more work for you to generate it!
Feel free to go ahead and set up an account. Really appreciate you asking! 👊
I’m having a hard time understanding the “never pay it off” strategy. Presumably the lender wants to make their money at some point. Is it just up to your heirs to pay it off with their inheritance? Will banks just lend you money forever and not ever expect anything in return?
Can you show an actual example of the 6 point something SBLOC with the related investment?
So if I borrow $50,000 at 7% interest, I would have to pay $3,500 A DAY!?!?
First off minimum amount you can borrow is $100,000.
2. No lol; $3500 total spread out every month up to 2 years
Great video. The accrued interest should be included with the principal and not exceed 50% of the total stock value, right? Thanks in advance.
That is correct
Can you not pay interest at all,just let it accrue, will there be penalties for non payment?
As you stated, unlike a regular loan (like a mortgage) you don’t have to pay down the principle and/or interest of a SBLOC/margin loan. So assuming you use margin on a regular basis (say every month for example) to buy more investments and/or use the SBLOC/margin as discretionary income, what would be a good “rule of thumb” for how high you should let your SBLOC balance get relative to the value of your portfolio before paying it down? Assuming you pay attention to your maintenance requirements (never getting close to a margin call), at some point, I would think you would want to pay down at least some of the principle (and interest) of the SBLOC?
Great question! I typically wouldn't let my SBLOC get above 40% of the value of the portfolio. However, with dividends and appreciation, you would expect the value of the portfolio to increase over time so that SBLOC available is going to increase. I've never been in a position where I've started paying off my SBLOC balance. Though of course one could foresee that being a possibility in a really bad market downturn.
@@sharonwinsmithThanks for the reply, really helpful! Follow on question… What would be a good strategy for how often to use (or increase) your SBLOC balance? Use it routinely (i.e. every month or quarter) to dollar cost average your investments? Or only when a unique investment opportunity becomes available?
I look at it every quarter or so and see if it makes sense to go higher on the balance. If I feel there is room, I would look for opportunities to deploy capital at that point (e.g., in an investment fund).
My brokerage set up something where the monthly interest amount is automatically pulled from a personal bank account. The monthly statements show the interest payments. Occasionally, I will make principal payments, so the balance stay below a threshold.
Question: Are you saying you can let the interest accrue and still tax deduct the interest. You have to make the payments to deduct.
If you don’t pay back any of the interest what would consider an amount that is out of control of accrued interest ? Is there limit of accrued interest they will allow ? Thanks
When the accrued interest is added to the balance of the outstanding SBLOC, you would have to take that into account when you are factoring in your ability to borrow up to 50% of your stock portfolio. So, the interest will increase the outstanding SBLOC balance and thereby reduce the available borrowing capacity for additional draws on the SBLOC. I try to never let my total outstanding balance of my SBLOC, including accrued interest, exceed 40% of my portfolio (using a reasonable estimate of the value of my portfolio at any given time).
@@sharonwinsmith
Thank you for responding ! If i didn't want to take anymore draws and let the interest run forever to the point it exceeded 50% of my portfolio would that be considered a margin call ? also im new to IBKR pro i was with Charles Schwab and My buying power is 3x of what i deposited im assuming that amount is what there allowing me to trade on margin ? I really appreciate your time and enjoy your videos Thanks!
The buying power is not related to an SBLOC. That would be relevant if you were buying shares on margin - which is something I would never do. A margin call is triggered when your portfolio value falls below the maintenance margin threshold. That is usually different from the 50% borrowing. You can borrow up to 50% of your portfolio value. So once the interest added exceeds 50%, you can't take anymore of an SBLOC at that point. You won't necessarily have a margin call at that point unless your portfolio value drops below the maintenance margin requirements for the SBLOC.
Accrued interest continues into perpetuity if it's never paid back, slowly causing the debt/value of the portfolio to decline. When that ratio is skewed enough, the brokerage will liquidate holdings (taxable event) to service the loan.@@sharonwinsmith
Compare this with an equity loan, maybe I should sell my other house and put it in stocks?
Happy holidays coach
Happy holidays! 🦃
Since it's a line of credit I'm assuming the interest that is a accruing is simple interest versus amortized interest like in a typical loan correct?
It would be more akin to simple interest. Even though the rate is variable, it is just applied to the outstanding balance.
@@sharonwinsmith Thanks for responding. Variable? Meaning it changes? If so is it the change dramatic?
Correct - the interest rate on the SBLOC is variable meaning it changes. I've seen it go from about 1.8% when rates were low to about 6.3% on my SBLOC right now. That is a dramatic change. However, I'm happy to borrow at a pre-tax rate of 6% all day long because my secondary investment returns far exceed that. It is also much lower than you are going to get from any bank or on an SBA loan.
@@sharonwinsmith I appreciate your response. also do you create your own payment plans to repay the loans back? If so, the owed loan balance would decrease and that 6.3% interest would also decrease in dollars I mean, because the loan owed keeps getting paid down. And your stock portfolio keeps rising in value. Hopefully I've said that right.
I don't ever pay the loan down.
So, if I get a 50k sbloc loan at 6% daily if I am understanding this right I get 3k a day added to the loan balance?
She clearly made her money selling these financial products lol
So if I understand, if you pay the interest only every month…….thats all you really need to do forever, for immediate use of the tax free money for the rest of your life. And if you have no reason to leave any inheritance, then the bank would repay itself from your portfolio when you pass.
Hi Sharon,
I got a quote on a SBLOC with an interest rate of 9.44%. That seems high and I'm wondering if this is still a good idea.
I have a significantly lower rate through IBKR. You should shop around for a lower rate on the SBLOC. Whether it's worth it depends on how you are planning to use the funds and the SBLOC strategy.
Thoughts on paying iit off with dividends from the same stock you’re borrowing from?
I usually have a DRIP in place but definitely think paying down the SBLOC over time with dividends is a great strategy as well.
If you don’t pay it back the stocks will be sold. This is not a good wealth transfer strategy.