Lombard Loans: Borrowing Against Your Investment Portfolio

The Lombard loan — named after the Lombard merchants of medieval Italy who pioneered secured lending — is one of the most powerful financial instruments available to HNW investors. It allows you to raise cash using your investment portfolio as collateral, without selling a single holding. Used well, it unlocks liquidity at relatively low cost, avoids forced asset disposals, and can be highly tax-efficient. Used poorly, it creates a dangerous feedback loop — falling markets triggering margin calls, forcing asset sales at the worst possible time, accelerating losses.

Understanding the mechanics, the risks, and the use cases is essential for any investor considering this facility.

Important: Lombard loan terms, eligibility criteria, and applicable asset haircuts change with market conditions. The risks involved are real and significant. Always obtain independent financial advice before entering into a Lombard facility.

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What Is a Lombard Loan?

A Lombard loan (also called a securities-backed loan, a portfolio loan, or a share pledge facility) is a revolving or term credit facility secured against a pledge of an investment portfolio — typically held in custody with the same private bank offering the loan.

The borrower retains beneficial ownership of the pledged portfolio. The securities continue to be invested and generate returns — dividends, coupon income, capital growth — as normal. The lender's security is the right to liquidate the pledged portfolio if the borrower defaults or fails to meet a margin call.

The loan-to-value ratio (the amount the lender will advance against the portfolio value) typically ranges from 50% to 70% of the portfolio's value — but this is an average across a mixed portfolio. Individual asset types are assessed separately and "haircutted" differently (see below).

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Typical Use Cases

Bridge Finance for Property Purchase

One of the most common private banking applications. You have seen a property opportunity that requires completion quickly. Your investment portfolio is invested but you do not want to sell — either because the market is favourable for holding, or because a sale would crystallise a significant capital gains tax liability. A Lombard facility against the portfolio provides the purchase funds; the facility is repaid when a subsequent sale (of another property, or a planned portfolio realisation) completes.

This is materially cheaper and faster than a bridging loan from a specialist lender (Lombard rates: currently approximately 1.5-3% above base rate; bridging: 0.6-1.2%/month, equivalent to 7-14% annually) and does not involve the extensive legal process a bridging loan requires.

Opportunity Finance

A time-sensitive investment opportunity arises — a private equity co-investment with a limited window, a distressed commercial property at a competitive price, an acquisition of a business stake. The Lombard facility allows you to act without liquidating existing holdings. Once the new investment is established, the facility may be repaid from income, or the new asset added to the collateral pool (if eligible).

Cash Flow Management

Some HNW individuals receive highly variable income — a private equity professional receiving a large carried interest payment every three to five years; a company founder taking dividends episodically; a property developer with lumpy project proceeds. The Lombard facility provides a smoothing mechanism: draw against the portfolio to fund living costs and tax liabilities in lean periods, repay when the large receipts arrive.

Tax Deferral

Selling appreciated assets triggers capital gains tax. Borrowing against them defers (but does not eliminate) the tax liability. A portfolio with £500,000 of unrealised gains: selling could crystallise CGT of up to £120,000 (at the 24% higher rate applying to most assets for 2026/27). Drawing a Lombard loan against the portfolio avoids the crystallisation — the loan must eventually be repaid, but if the assets continue to appreciate and/or if a tax-efficient disposal strategy (using the annual exempt amount over multiple years, or offsetting losses) can be executed over time, the overall tax cost is reduced.

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The Margin Call Risk

The single most important concept in Lombard lending is the margin call — and the circumstances under which it occurs.

The lender sets a maximum LTV against the portfolio (say, 60%). If the portfolio falls in value, the outstanding loan becomes a higher percentage of the portfolio value. At a pre-set threshold (say, 70% LTV), the lender issues a margin call:

"The value of your collateral has fallen. You must, within 48-72 hours, either: (a) repay part of the outstanding loan to reduce the LTV below the threshold; (b) add additional assets to the collateral pool; or (c) allow us to liquidate collateral to reduce the LTV."

Why the Margin Call Is Dangerous

A market correction creates a double problem for Lombard borrowers: the portfolio has fallen in value (paper loss) AND the lender is demanding either repayment or liquidation. To meet a margin call in a falling market, the borrower must:

• Raise cash quickly (sell other assets, draw on other facilities, liquidate part of the pledged portfolio)
• In the worst cases, this means selling equities at depressed prices, at exactly the wrong moment

The 2020 COVID market correction (-33% peak to trough in 6 weeks) and the 2022 rate shock correction (-25% for global equities) both generated significant margin calls across the private banking industry. Clients with Lombard facilities at high LTV faced forced selling at market lows — the classic Lombard loan risk materialised.

Rule of thumb for managing margin call risk: Maintain the outstanding Lombard balance at no more than 40-50% of the portfolio value if the maximum LTV is 60-70%. This provides headroom — a 30-40% market fall would be needed to trigger a margin call if you are managing at 40% LTV. The 2020 COVID crash of 33% would not have triggered a margin call at this level.

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Eligible Collateral and Haircuts

Not all assets are equally eligible as collateral. The lender assesses each asset type and applies a haircut — a reduction from market value — to reflect liquidity and volatility risk.

High Eligibility (Low Haircut: 10-20%)

• UK and US government bonds (gilts, Treasuries): Highly liquid, low volatility, near-cash. A £1m gilt holding may support a £800,000-£850,000 loan.
• Investment grade corporate bonds (short-dated): Good liquidity, moderate credit risk.
• Large-cap equity index ETFs (FTSE 100, S&P 500, MSCI World): Liquid, diversified. Haircut typically 25-35%.

Moderate Eligibility (Moderate Haircut: 30-50%)

• Individual large-cap equities (blue chip, FTSE 100/S&P 500 components): Eligible but higher haircut than diversified funds due to concentration risk.
• Investment grade credit funds (UCITS): Liquid but priced once daily.
• Multi-asset balanced funds: Depending on underlying composition.

Lower Eligibility or Excluded

• Small and mid-cap equities: Higher volatility, lower liquidity, substantial haircut (50-70%) or excluded.
• Hedge funds, private equity, illiquid alternatives: Typically excluded entirely — cannot be liquidated quickly to meet a margin call.
• Property (physical real estate): Cannot be pledged as security for a Lombard loan (a separate mortgage is the relevant instrument).
• Concentrated single-stock positions (typically >25% of portfolio in one stock): May be excluded or heavily haircutted due to concentration risk.

Practical Implication

A mixed portfolio of £1,000,000:

• 40% in gilts and investment grade bonds (£400,000): lender may advance 80% = £320,000
• 40% in global equity ETFs (£400,000): lender may advance 65% = £260,000
• 20% in hedge fund (£200,000): excluded = £0

Total portfolio advance: approximately £580,000 — 58% of portfolio value. This is the actual borrowing capacity, which differs significantly from a blanket "70% of portfolio value" headline.

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Interest Rates and Cost

Lombard loan rates are typically:

• Variable: base rate (Bank of England Bank Rate or SONIA) plus a margin
• The margin depends on the quality of the collateral, the borrower's relationship with the bank, and the size of the facility
• Current indicative range (mid-2026): base rate + 1.25% to + 3%

For a borrower with a diversified high-quality portfolio and an established private banking relationship, base rate + 1.5% is achievable. For a smaller facility with a less established relationship, base rate + 2.5-3% is more typical.

Interest is typically charged monthly on the drawn balance. There is no amortisation — the Lombard loan is a revolving facility; principal is repaid at the borrower's discretion (subject to maintaining LTV covenants).

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Tax Treatment of Lombard Loan Interest

The deductibility of Lombard loan interest depends entirely on what the money is used for:

• Used for personal expenditure (living costs, property purchase for personal use): Not deductible.
• Used for qualifying investment purposes (investing in income-producing assets, acquiring assets for trade): Potentially deductible under the "loan relationships" rules or the "eligible interest" rules — but the purpose test is strict and the rules are complex.
• Drawn against a portfolio held in a limited company: The company can typically deduct the interest as a financing cost in the company's corporation tax computation.

The tax position requires specific advice for each use of the facility. Do not assume deductibility without a clear analysis.

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How Global Investments Can Help

Global Investments works with HNW clients who hold significant investment portfolios alongside property and other assets. The Lombard loan is one of the tools we regularly discuss in the context of property acquisition finance, portfolio rebalancing, and cash flow management.

We can introduce you to private banking providers with competitive Lombard lending terms, help you model the margin call risk under stress scenarios, and ensure the Lombard facility is integrated into your broader financial planning rather than treated in isolation.

This guide is for general educational purposes only and does not constitute financial or investment advice. Investment values can fall as well as rise. Lombard loans involve significant risk including the potential for forced asset liquidation at unfavourable prices. Always seek independent advice before entering into a Lombard facility.