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Lock in low: Explore the benefits of fixed-rate borrowing

Fixed-rate loans can be beneficial when used strategically

 

 

BORROWING IS A BALANCING ACT — BUT LOW RATES COULD TIP THE SCALES. When presented with an exciting investment opportunity or the need for a large purchase, you might think about dipping into your savings, selling investments or using a variable-rate loan to provide liquidity. But with rates hovering near historical lows, you may want to consider locking into a fixed-rate loan. With a fixed rate, you can avoid a disruption to your savings and investments and potentially avoid a rise in your rate.

 

A closer look at the current interest rate environment

To help illustrate how interest rates have changed, let’s examine the ICE Swap Rate®. In February 2020, the 2-year ICE Swap Rate was 0.982%. As of June 9, 2021, the rate has fallen to 0.261%. That’s a good indication that borrowing costs are low — making it an opportune time to consider borrowing instead of selling investments to fund a purchase.

Note: This is for illustrative purposes only and is not indicative of your actual loan rate.

 

Source: ICE Benchmark Administration Limited (IBA), ICE Swap Rates, 11:00 A.M. (London Time), based on U.S. Dollar, 2 Year Tenor [ICERATES1100USD2Y], retrieved from FRED, Federal Reserve Bank of St. Louis.

Consider your funding choices

  • Use cash. One choice for funding a purchase or capitalizing on an investment opportunity is using cash you already have on hand. The obvious benefit of this is that you will not be charged interest, nor do you have to worry about the negative effects of liquidating an investment. However, the cash you have on hand may be part of an emergency fund or earmarked for other unexpected expenses or needs.
  • Sell investments. While selling investments can provide the funds you want, it often has downsides. Disrupting your investment strategy can lead to tax consequences, transaction costs and missing out on future market gains and potential income from that security. Similarly, selling at a loss removes the chance of a future price recovery in your portfolio.
  • Obtain an adjustable-rate loan. Adjustable-rate loans can also be used to provide funds, and may be attractive because of lower rates and payments at the beginning of the loan term. However, as indicated in the name, the interest rate on adjustable-rate loans can change; in the current environment, it is unlikely rates will adjust lower.
  • Take advantage of a fixed-rate loan. A fixed-rate loan locks in an interest rate for a specific period of time. Entering into a fixed-rate loan now means you don’t have to worry about rising interest rates for the duration of your term. Accessing credit without selling securities may also help you keep your investment strategy intact and leave your current liquidity in place for other needs. Along with the potential benefits, it is also important to understand that fixed-rate loan options, if prepaid, are subject to breakage fees which can be substantial. To see additional risks of borrowing (see "Risks" section).

 

Fixed-rate borrowing from Bank of America

LMA account

The LMA account is a flexible line of credit offered by Bank of America, N.A. that can be used for a variety of needs.

  • Can be used to fund personal and investment real estate purchases, tax payments, education costs, debt consolidation3 and business startup or acquisition needs
  • Competitive interest rates based on your overall relationship size
  • Flexible repayment options
  • Access available credit through LMA checks, free Fedwire or a transfer to a Bank of America checking account
  • No minimum draw or annual fee
  • Ability to use personal, business or eligible third-party accounts, or a combination, as collateral

 

Custom lending

Custom lending is a suite of customized loan options personalized to your specific goals and objectives that enables you to maintain your investment strategy by borrowing against assets.

  • Can be used to fund real estate and luxury purchases, business and investment opportunities and even unexpected large expenses
  • Bank of America Credit Executives work with you and your Merrill advisor from start to finish
  • Tailored to your time frame, cash flow needs and collateral types
  • Attractive loan structures, competitive rates and flexible terms
  • Marine, fine art, hedge fund, derivative, real estate and aviation subject matter experts

 

Next steps

No one is sure how long rates will remain low, so now may be the right time to act. Your Merrill advisor and a Bank of America Credit Executive can work with you to decide if an LMA or custom lending may be a good fit for your goals, cash flow needs, time horizon, risk tolerance and other important factors.

 

Risks

LMA borrowing

Securities-based financing involves special risks. Clients should review their LMA Loan Agreement and related documents and disclosures carefully and consult with their own independent tax and legal advisors.

Some risks to consider include:

  • For fixed-rate advances and term loans, principal payments made in advance of the end of the applicable fixed-rate period, whether voluntarily or involuntarily (due to demand or liquidation by the Bank), may be subject to a substantial breakage fee as determined by the Bank.
  • A decline in the value of collateral assets may require the client to provide additional funds or securities to avoid a collateral maintenance call. Clients can lose more funds than are held in the collateral account. The LMA account is a full recourse loan and the account holder will be liable for any deficiency.
  • Bank of America ("The Bank") can force the sale or other liquidation of any securities or other investment property in the collateral account and, unless otherwise required by law, can do so without first contacting the account holder.
  • The account holder is not entitled to choose which securities in the collateral account are liquidated or sold.
  • The Bank can change its collateral maintenance requirement at any time without notice to clients.
  • Clients are not entitled to an extension of time to satisfy the Bank’s collateral maintenance requirement.
  • There may be adverse tax or other consequences to clients if securities are sold or otherwise liquidated by the Bank.
  • The LMA account is an uncommitted facility, although loans to individuals and trusts may be committed in an amount not to exceed$100,000. The Bank may demand full or partial repayment at any time, and any commitment may be immediately terminated.
  • Some restrictions on the use of an LMA account proceeds may apply under the terms of loan documents and applicable laws and regulations. The LMA account cannot be used to purchase marketable securities unless specifically agreed by the Bank.

1 The Loan Management Account (LMA account) is a demand line of credit provided by Bank of America, N.A., Member FDIC. Equal Opportunity Lender. The LMA account requires a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum credit facility size of $100,000. All securities are subject to credit approval and Bank of America, N.A. may change its collateral maintenance requirements at any time. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call without notice to the client, the client is not entitled to an extension of time on the collateral call and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. The LMA account is uncommitted and Bank of America, N.A. may demand full repayment at any time. A complete description of the loan terms can be found within the LMA account agreement. Clients should consult their own independent tax and legal advisors. Some restrictions may apply to purpose loans and not all managed accounts are eligible as collateral. All applications for LMA accounts are subject to approval by Bank of America, N.A. For fixed rate and term advances, principal payments made prior to the due date will be subject to a breakage fee.

 

2 Customized lending may involve special risks and may not be appropriate for all clients. In particular, structured lending may be subject to additional credit and legal approval because of special risks and restrictions that need to be carefully considered. Real estate financing and specific program options and property types may not be available in all states and may be subject to change from time to time. As a general rule with respect to each client, consideration must be given to capital gains tax implications, portfolio makeup and risk tolerance, portfolio performance expectations and investment time horizon.

 

3 The relative benefits of a loan for debt consolidation depend on your individual circumstances. For example, you may realize interest payment savings by making monthly payments towards the new, lower interest rate loan in an amount equal to or greater than what was previously paid towards the higher rate debt(s) being consolidated.

 

Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of BofA Corp., each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based financing involves special risks and is not for everyone. When considering an asset-based loan, consideration should be given to individual requirements, asset portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors. Securities-based financing involves certain risks. We can help you take into account your individual requirements, portfolio composition and risk tolerance, as well as capital gains taxes, portfolio performance expectations and investment time horizon.

 

Securities-based financing may not be in the best interest for all clients. The loan is secured by assets in your Merrill account(s). Market fluctuations may result in a collateral call, and you may need to deposit additional cash and/or securities to meet the call or risk liquidation of your securities at an unfavorable price. In some cases, the securities pledged as collateral may be liquidated. Among other things, this may have negative tax implications for you, especially if the liquidation price of the securities liquidated exceeds your basis. The firm can sell your assets to meet a collateral call without notifying you, and you are not entitled to choose which securities in the account will be sold. You are not entitled to an extension of time to meet a collateral call.

 

Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of BofA Corp. Equal Housing Lender. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.equal housing lender logo

 

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