Lombard lending is a form of borrowing in which you pledge your investment portfolio as collateral for a cash loan without selling any of your holdings. A private bank or wealth management firm advances you a percentage of your portfolio’s market value, and you keep collecting dividends, interest, and capital appreciation while the loan is outstanding. Because the lender holds marketable securities as security, underwriting is faster and cheaper than a traditional bank loan, and the cash can be used for almost any purpose. The catch is that the collateral moves with the market, and that single fact drives everything else worth knowing about these loans.
How the Loan Actually Works
A Lombard loan is a credit facility secured by liquid financial assets sitting in an investment account. You keep ownership of the pledged securities for the life of the loan. Dividends, interest, and capital gains still flow to you. The lender’s protection is a security interest in the portfolio: if you default, it can sell those assets to recover what you owe.
The proceeds are flexible. You can use the cash for personal or business purposes, from real estate to a private equity capital call to a short-term cash need. This “non-purpose” flexibility is one feature that distinguishes Lombard facilities from how many people think about margin borrowing. The SEC has noted that some brokers also allow margin loans for personal or business uses like real estate or paying off debt.1SEC.gov. Understanding Margin Accounts The practical difference is that Lombard loans are typically offered by banks and private wealth firms under a different regulatory framework, generally to clients with larger portfolios, and are structured from the start as general-purpose credit lines.
Because the loan is fully collateralized, rates are lower than unsecured personal loans or credit lines. The lender evaluates the quality and liquidity of your portfolio rather than putting you through months of income verification. Most facilities can be set up in days.
What You Can Pledge and How Much You Can Borrow
Lenders accept only highly liquid, easily valued financial instruments as collateral. Publicly traded stocks, investment-grade bonds, diversified mutual funds, and exchange-traded funds all qualify. Private company shares, hedge fund interests, and thinly traded securities are usually excluded or assigned zero collateral value.
The loan-to-value ratio determines how much you can borrow against each dollar of collateral. A portfolio heavy in U.S. Treasury bonds might support an LTV as high as 90%, meaning you could borrow $900,000 against $1 million in Treasuries. Diversified equity portfolios typically receive LTVs in the 50% to 70% range. Concentrated single-stock positions or volatile sector funds drop much lower, sometimes to 20% or 30%. Some positions may be ineligible altogether.
Take a $1 million portfolio of diversified stocks assigned a 60% LTV. That supports a maximum loan of $600,000, leaving a $400,000 equity cushion to absorb market declines before the lender’s principal is at risk. Lenders revalue the collateral daily against your outstanding balance, and if your portfolio becomes more concentrated or market conditions shift, they can adjust LTV ratios accordingly.
How the Interest Rate Is Built
Lombard rates typically have two components: a benchmark rate plus a credit spread. Most facilities today use some form of the Secured Overnight Financing Rate as the benchmark.2Federal Reserve Bank of New York. Secured Overnight Financing Rate (SOFR) The specific variant depends on the lender: some use Daily Simple SOFR, others use 30-Day Average SOFR.3Federal Reserve Bank of New York. An Updated Users Guide to SOFR
On top of the benchmark, the lender adds a margin that compensates for the specific risk of your loan. Spreads vary widely based on loan size, collateral quality, and your relationship with the institution. For large, well-diversified portfolios at major private banks, spreads can be under 1%. Smaller facilities or riskier collateral push spreads higher. SOFR stood at approximately 3.64% in early 2026.4FRED, Federal Reserve Bank of St. Louis. Secured Overnight Financing Rate (SOFR) A borrower with a competitive spread of 0.75% on top of that would pay an all-in rate around 4.4%, well below most unsecured borrowing.
The Tax Reason People Actually Do This
For wealthy borrowers, the appeal is not the interest rate. It is tax deferral. When you sell appreciated investments, you owe federal capital gains tax on the profit. Long-term capital gains rates for 2026 run from 0% up to 20%, depending on your taxable income and filing status.5Internal Revenue Service. Topic No. 409, Capital Gains and Losses The 20% rate kicks in at $545,500 of taxable income for single filers and $613,700 for married couples filing jointly.
For the high-net-worth borrowers who use these loans, there is an additional layer. Taxpayers with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) also owe a 3.8% net investment income tax on the lesser of their net investment income or the amount exceeding those thresholds.6Internal Revenue Service. Topic No. 559, Net Investment Income Tax Those thresholds are not indexed for inflation, so they capture more taxpayers each year. For someone in the top bracket, the combined federal hit on long-term capital gains is 23.8%, not the 20% figure typically quoted.
Borrowing against the portfolio instead of selling gives you the cash without triggering any of that. The portfolio keeps compounding, and the tax bill never arrives while you hold the assets. The math is especially compelling when the after-tax cost of loan interest is lower than the capital gains tax you would have owed on a sale.
Buy, Borrow, Die
Push the tax deferral idea to its logical conclusion and you arrive at what tax professionals call “buy, borrow, die.” First, you accumulate appreciated assets and hold them. Second, rather than selling, you borrow against the growing portfolio to fund your lifestyle or new investments. Third, when you die, your heirs inherit the portfolio with a “stepped-up” cost basis equal to fair market value at the date of death.7Office of the Law Revision Counsel. 26 USC 1014 Basis of Property Acquired From a Decedent
The stepped-up basis wipes out the unrealized capital gain that accumulated during your lifetime. Heirs can sell at the new basis and owe little or no capital gains tax. The loan balance gets repaid from the estate, but the capital gains tax that would have been owed on a lifetime sale never materializes. This is legal under current law, though it has drawn increasing legislative scrutiny. It also explains why Lombard lending sits so close to the center of wealthy families’ financial planning: the loan is not just a convenience tool, it is a structural tax strategy.
When the Interest Is Deductible
Interest paid on a Lombard loan may be deductible, but the rules turn entirely on what you do with the borrowed money. If the proceeds are used for investment purposes, the interest qualifies as “investment interest expense,” deductible up to the amount of your net investment income for the year.8Office of the Law Revision Counsel. 26 US Code 163 – Interest Net investment income includes dividends, interest, and short-term capital gains from your portfolio, minus investment expenses. Any excess investment interest expense carries forward to future years indefinitely.
If you use the proceeds for personal expenses, like a vacation home you won’t rent out, the interest is generally not deductible. If you split the proceeds between investment and personal use, you allocate the interest accordingly.9IRS.gov. Form 4952, Investment Interest Expense Deduction IRS temporary regulations track where the money actually went, not stated intent. Keep clean records of how every dollar of proceeds was deployed.
One subtlety catches people. Qualified dividends and long-term capital gains are excluded from net investment income for this deduction unless you affirmatively elect to include them. Making that election means those dividends and gains get taxed at ordinary income rates instead of the lower capital gains rates. Whether the trade-off is worthwhile depends on your specific numbers, and it is worth running by a tax advisor before filing.
Regulation U and the Form U-1
Lombard loans extended by banks fall under Federal Reserve Regulation U, which governs credit secured by margin stock.10eCFR. 12 CFR Part 221 – Credit by Banks and Persons Other Than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock (Regulation U) The core question Regulation U asks is what you plan to do with the loan proceeds. If the loan is for buying or carrying more securities (“purpose credit”), strict margin requirements apply. If the loan is for any other purpose (“non-purpose credit”), like buying real estate or funding a business, those margin limits do not apply, even though the collateral is still securities.
This is why you sign a Form U-1, the Federal Reserve’s Statement of Purpose, at origination. The form requires you to certify the intended use of the proceeds. Falsely certifying purpose violates both Regulation U and Regulation X, which applies directly to borrowers.11Federal Reserve. Statement of Purpose for an Extension of Credit Secured by Margin Stock (Federal Reserve Form U-1) You cannot take out a Lombard loan, claim you are buying real estate, and use the money to trade stocks. The form is not a formality.
If a bank extends both a purpose loan and a non-purpose loan to the same borrower, Regulation U requires the two to be treated as separate credit facilities. Collateral securing one cannot be counted as collateral for the other.10eCFR. 12 CFR Part 221 – Credit by Banks and Persons Other Than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock (Regulation U) One pile of securities cannot support two different loans simultaneously.
Margin Calls and Forced Liquidation
Here is where Lombard lending gets dangerous. Because your loan balance stays constant while your collateral value moves with the market, a significant portfolio decline can push the LTV past the lender’s maintenance threshold. When that happens, you get a margin call.
A margin call is the lender telling you your collateral no longer provides enough cushion and that you need to close the gap. If the loan was originated at a 60% LTV and the lender’s maintenance threshold is 80%, the call triggers when your portfolio drops enough that the outstanding balance represents 80% or more of current market value. You typically have a short window to respond, often one to three business days, though the specific timeline depends on your loan agreement.
You can satisfy a margin call two ways: deposit additional cash into the collateral account, which directly reduces the LTV, or pledge additional eligible securities, which raises the collateral value. If you do neither in time, the lender can start selling your holdings to bring the ratio back in line. FINRA has warned that lenders can often make these decisions without giving advance notice and that borrowers may be “forced to sell your assets at the bottom of the market.”12FINRA. Securities-Backed Lines of Credit Explained
Forced liquidation at the worst possible moment is the biggest risk in Lombard lending. A borrower who pledged a concentrated tech portfolio in January could face margin calls during a March correction with no time to wait for a recovery. Loan agreements typically give the lender wide discretion over which securities to sell and in what order. In rapidly deteriorating markets, some contracts allow the lender to liquidate without issuing a formal margin call at all.
Other Risks Worth Weighing
Concentration risk amplifies the margin call problem. A portfolio dominated by a single stock or sector is more likely to experience the sharp, sudden decline that triggers a call. Lenders assign lower LTVs to concentrated positions for that reason, but borrowers sometimes treat the lower borrowing capacity as a challenge to work around rather than a warning.
Interest rate risk is quieter but real. Most Lombard facilities carry variable rates tied to SOFR. If rates rise, your borrowing cost climbs while collateral values may simultaneously fall, since rising rates tend to pressure both equity and bond prices. A loan that looked cheap at origination can become expensive quickly.
Then there is behavioral drift. A Lombard facility is a revolving line, and it is easy to draw more than originally planned. Borrowers who start with a conservative LTV can creep toward the maintenance threshold as they fund additional expenses, reducing the buffer that protects them during market stress. The discipline to maintain a meaningful gap between the outstanding balance and the maximum borrowing capacity is what separates borrowers who use these facilities well from those who get hurt by them.