Investment brokerage rates vs. mortage rates

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muzie_IHB

muzie_IHB

New member
Hi everyone,





So amidst the continuing slashing of interest rates by the Fed, I've come to notice that the financing rate for investment brokerage financing seems remarkably low: currently it stands at 3.95% for balances above 100K$, or benchmark rate + 1%. This seems substantially better than what I see on bankrate.com at 6.08%.





Well, at this point I'm thinking, what is to stop someone from actually using their investment brokerage to borrow USD directly at a lower rate and pull out the money to fund purchase of goods (or even a high-priced item such as a car or house) , then doing "payments" to keep within margins? Instinctively, I can just get a feel that 1) this could be insanely risky if constructed wrong and 2) there has got be some failsafe mechanism/law/rule that just doesn't make this possible. Looking through my brokerage contracts I couldn't find anything relating to that situation.





So, out of curiosity, I just had to ask? :-) Forgive me if what I'm wondering about is really dumb, but where is the failsafe mechanism that prevents such a situation for happening? If there isn't any, does that make brokerage accounts more competitive?





-Muzie
 
Well, thinking more about it, 6.08% is a 30-year fixed rate, so it's apples to bananas with a brokerage account where the interest rate is constantly floating (and thus much riskier). A closer (but not exact) comparison would be a 1/1 ARM option mortgage. What's the current rate on those? The spread is probably much narrower.
 
<p>The benchmark used to set your brokerage margin rate is the Broker Call Rate. It is currently at 4.75%. It's not the Fed Fund, nor the 3 month LIBOR rate. So benchmark rate + 1% is actually 5.75%.</p>

<p>It is possible that you could get margin rate at 3.95%, maybe even 3.75% (benchmark -1%) from your broker. However these preferential rates are only given when two conditions are met. 1) The account generates lots of revenue. Usually it needs to be north of several hundred thousand dollars in fees/commissions per year. This kind of imply the second condition. 2) The debit balance on that margin account needs to be north of several millions of dollars at the very minimum.</p>
 
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