Where can I buy mortgaged securities
A securities loan is granted exclusively for the purchase of securities that can be traded on the capital market. It is a subspecies of the Lombard loan. The deposit in which the papers are located is pledged to the bank as collateral. However, since the price of securities can fluctuate significantly, the bank will not use the current value of the deposit as a basis, but only grant the loan up to a certain percentage, which is based on the risk of the securities.
So if a loan of 10,000 euros is to be taken out in order to buy bonds with a 50% loan-to-value limit, the buyer would either have to invest 10,000 additional equity (50% is also taken into account), or already have securities in their custody account that also have a total loan value of 5,000 euros for the bank.
So let's assume that the lending limit of 50% applies to all papers in the custody account, the current market value of the custody account must be 20,000 euros in order to secure a loan of 10,000 euros.
Disadvantages of pledging
Since the deposit is pledged to the bank, the borrower can no longer access it. He can still buy securities if he has the money, but selling them is not easy. If he has to react to market fluctuations, this is only possible if he gets the permission of his bank. If the remaining papers are sufficient as security, a sale is usually approved.
There is interest to be paid, but no repayment
As with any other loan, the borrower has to pay interest. Ideally (and that is precisely the intention) the customer will get a higher return on their securities over the year than they pay for the loan. The loan usually has a fixed term, after which the customer has to repay the full amount. He could make this possible by selling his papers. However, as long as the prices are good, you will usually extend the loan again and again.
Total loss threatens
If you finance the purchase of securities with borrowing, you are buying twice the risk. On the one hand, you have invested a certain amount of equity. So if a price collapse occurs, your own money is completely gone. In addition, however, you still have to repay a loan. So the risk has almost doubled.
Security measure by the bank
If the deposit value falls below an agreed limit, the customer is asked to provide additional security. If he does not do this, the bank will sell as much paper as it needs to secure the loan.
Most of the clients are professionals
In the case of securities loans, one can generally assume that the customers already have some experience in the securities business. As a rule, the reason for the securities loan is that there is currently a good market opportunity for the purchase, but the funds that could be used for it are currently not liquid, for example because they are fixed, or the sale of other securities only with a loss would be possible.
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