Investment backed lending is a strong product for many private banks and wealth providers and can be very profitable for the lender and a good source of return for the investor/borrower over a period of time.
Leveraging your investments to increase the value of your overall portfolio can provide both a rise in capital value and provide income returns over and above the cost of the borrowing. The capital cost on providing lending facilities against a well-diversified liquid portfolio is opportunistic for the lender and provides a good borrowing cost for the borrower.
My main experience of these products is in Switzerland and Asia but they are offered worldwide and the level of regulation from country to country is vastly different, as is what they can be used for.
The lender has a responsibility when making such facilities available to the client on the basis of what is the client’s risk appetite to investments if managed or advised by the lender. A client with a low to medium risk appetite to investments should not be encouraged to leverage against such assets. There is a concern (as we know) that assets can both rise and fall in value - where this is your main investment driver you should not consider borrowing against them as this can potentially create a greater problem with cost of borrowing increasing while the asset value is falling. If your risk appetite to investing is medium to high, and the risks involved are acknowledged then investment backed lending can be very remunerative.
What are the main considerations?
From a lender’s perspective there is a responsibility to ensure the borrower is aware of the risks and issues involved in leveraging their portfolio plus what may change should the overall global economy change. On day one the loan to value applied to a borrower’s portfolio could be X% but if worldwide markets dictate a higher risk then the lender has to have the ability to reduce the reliance they will place on any asset.
It is essential from a lender’s perspective that there are adequate controls to ensure any leveraged portfolio can be properly monitored and that the borrower is very clear about the risks and the documentation.
The lender must have the ability to monitor a borrower’s portfolio for such things as asset class, stock diversification, business diversification, country risk etc! A borrower may have a large portfolio but limited to certain countries or sectors which if an event means values in these sectors fall the value of the assets may not provide sufficient cover for any loan secured on them. Such information should be provided to the borrower on an agreed and regular basis.
Initially any person from the lender engaged in the process has to be authorised to sell such products. This could be the investment specialist or there could be a separate lending specialist who discusses the leverage facility. Within any discussion it should be made clear (and acknowledged) that there is a considerable risk involved in such facilities and the value of the assets charged can rise and fall. Furthermore it should be made clear that whilst the loanable value of an asset today may be, for example, 80%, this will depend on the worldwide economy, level of diversification of the portfolio, and asset classes.
From a lender’s perspective they may advise a client to switch investments from, for example, equities to structured deposits or hedge funds. This can have a significant effect on both the lender and the borrower as the lender’s capital requirements may be breached given the capital requirements will change and there may be issues with the regulator in such cases. This I have seen on many occasions when perhaps the investment arm of a lender changes strategy to maximise returns or a borrower has a change in risk strategy.
Documentation from any lender should be clear that investment backed lending is a high risk product and that there will be changes in the lending values available depending on asset class, diversification risk, etc; the borrower must be aware of these risks and the lender must act on their Terms and Conditions.
The lender must be able to monitor the overall position based on value and composition of the portfolio, level of borrowing, and currency risk. This protects both the lender and the borrower.
Within a portfolio there should be triggers which indicate a lack of margin, margin call, and close out. These levels, within reason can be decided by the lender but the borrower must be aware. For example, if a client has a GBP 10M well diversified portfolio and has invested GBP 3M of their own money and borrowed GBP 7M, this is a high risk strategy with a lending value of 70%. Should the reliance increase to 72%, due to market movements, the lender should advise the borrower there is a shortfall and please take action. Should the reliance increase to 75% then the lender may issue a margin call, meaning the borrower must remediate the position within the regulatory time frame, 48–72 hours in most cases. If this is not completed it must be made clear the lender may close out the position by selling investments to reinstate a satisfactory lending ratio or repay any borrowing.
The main issues arise when, due to market conditions, things go wrong, and margin call/close out notices are delivered. It is possible borrowers may ask for more time to pay or meet such a call. These need to be seriously assessed. Should markets come back and any shortfall be addressed through market movements, this corrects the position but cannot be relied upon. If Terms and Conditions state that if in the event of margin call or close, the lender will take action within a specified time frame, but then does not follow up and receives no acknowledgement from the borrower, should markets continue to fall the borrower could argue: “you did not take action at margin call level and you have lost me more money”. This is not uncommon.
Regulation
Any country will have its own rules on such products. In the UK, such facilities will fall under the Consumer Credit Act or potentially depending on use of funds the Mortgage Credit Directive in the EU. Borrowers must be aware of this and ensure documentation, monitoring and advice are robust.
Key Take Aways for the Product
There must be:
This is a good product in a growing economy where there is little need for action and both the lender and the borrower benefit, but in more troubled times, as we have seen from time to time in the past, where markets fall or investors change asset classes and diversification, it is essential that documentation and monitoring protect all parties involved.
October 2026