Interest in securities-based loans as an alternative to mortgages has cooled off significantly since the summer, when they were a popular alternative to an at-the-time hot housing market.

Since the summer, the market has slowed down and with it demand for securities-based loans as a home purchasing option. They were a popular tool because they provide a direct access to cash. When there was significant demand over a limited housing stock, a securities-based loan could make an offer stand out.

The sluggish market is one of several factors that led to this decline in the loans. They were always a risky option and are approved using an investor’s assets in their after-tax investment account as collateral. These borrowing vehicles generally have lower rates than a traditional mortgage, although they can fluctuate.

That reliance on an individual’s assets is another drawback to these loans. Dan Duca, associate director at Altfest Personal Wealth Management in New York City, said he has seen a decline in the number of clients who have asked for the product, although he admitted he works with a small sample size.

“Financial markets broadly speaking have had a difficult time in 2022 so the value of investors’ collateral has declined so has the collateral used for these loans,” he said. “In some cases, this makes it more difficult to get the loans or the amount of money that would be needed.”

That’s not to say that securities-based loans have not found their use in other facets. Jalina Kerr, managing director of client experiences for Schwab Advisor Services at Charles Schwab, said that while her firm has seen a softening in the use of the products, they have not gone away altogether.

“Somebody who is in a practice with an advisor is still making use of these more readily than perhaps someone who is not in an advisory relationship,” she said. “I think generally speaking advisors are going to know—because of the holistic experience they’re having with their clients—when this could be used for their clients.”

The firm is seeing advisors recommend these loans for a variety of options, including helping to generate cash for home purchases and other needs-based borrowing including commercial real estate and as a portfolio construction strategy.

There is a further distinction among the asset classes as about 10% of Schwab’s ultra-high-net-worth clients are using some type of collateralized lending product while only about 2% of the mass affluent client base is using them, Kerr said.

“That’s a pretty big disparity when you think about the types of households that are using these loans,” Kerr said. “We’re seeing more of that in the ultra-high-net-worth space while others are sideling for a little bit.”

The disadvantages that made securities-based loans risky have become more prominent in recent months. With the Federal Reserve aggressively raising interest rates to combat inflation, the rates of these loans have gone up. Securities-based loans have a variable rate while standard mortgages have a fixed rate.

Kris Maksimovich, president and founder of Global Wealth Advisors, which is based in Lewisville, Texas, said the loans themselves have become less attractive due to those rising rates. Over the summer while they were still popular, Maksimovich encouraged his clients to move out of the variable rate products and into more secure ones.

“We had been anticipating there would be a move ... and our clients might consider switching to a fixed-rate line or paying the loans down if they had the means to right away and thankfully most of them heeded that advice,” he said.

A benefit of a securities-based loan is its fast approval process. It can take weeks for a mortgage approval while it will take less time to receive a securities-based loan. The time varies depending on the institution a buyer is working with.

The accelerated timeline made the products ideal for a retail purchaser to get in on the purchase of a home particularly when there was significant competition. 

Others used the loans as a bridge to get in on a house while they waited for approval of a standard mortgage. While that use has continued, the number of clients seeking to make that request has declined, according to Maksimovich. The number of those seeking mortgages has also declined.

“Financing across the board has gotten less attractive so it's not just these securities-based loans,” Duca said. “I think the securities-based loans that use one’s investment portfolio as collateral are often thought of as riskier in some respects than a traditional mortgage or other types of loans.”

The housing market is down in general although much of that depends on where a person lives. While the numbers are down in the Northeast where Schwab and Altfest are located, Texas-based Global Wealth is still seeing certain hot housing markets.

Even though the market for securities-based loans might still be soft, Schwab has inked a deal with a third-party digital provider and will roll out a new tech platform later this year, according to Kerr.

She declined to name the firm, but said the new platform will expediate the process for securing securities-based loans by digitizing the entire experience to avoid a lengthy paper process.

“No one wants to deal with a really lengthy paper application process that takes weeks on end to get through,” Kerr said.