Pablo Picasso got a home loan.
Many wealthy home buyers are getting loans that are secured with high-value assets, such as fine art and investment accounts. While many of these buyers could purchase the home outright with cash, they’re choosing this loan in order to maintain liquidity.
Borrowers can get them in as little as one to 30 days after applying, compared with the two- to three-month waiting period that currently exists for mortgages with many lenders. They also don’t require a home appraisal, which has derailed many mortgage applications over the past few years.
In many ways, experts say, the process allows borrowers to have the best of both worlds. They retain the asset that they’re using as collateral for the loan—the artwork.
for instance, continues to hang in their home or the investment account remains untouched—and the loan they get can charge a low rate, often ranging from roughly 0.71% to 3.25%.
In most cases, borrowers turn to private banks and wealth-management divisions of large banks where they maintain significant assets.
Jim Minich, managing director of capital advisory services at Harris myCFO, a subsidiary of BMO Financial Group, cites an instance when an art collection mostly comprised of Picassos was used to purchase a roughly $12 million apartment in Manhattan.
Many institutions say demand is rising. J.P. Morgan Private Bank says the dollar amount of loans secured by clients’ assets for real-estate purposes increased 20% last year. At Wells Fargo Private Bank, about one-third of all the loans on its books are secured by clients’ liquid assets, such as investment accounts. Moreover, applications for these loans—used for a variety of purposes, including purchasing homes—are submitted daily. It also receives one to two requests per month for art loans, up from one to two a year in 2010. “There’s definitely been a surge of people using art as collateral for loans,” says Suzanne Gyorgy, global head at Citi Private Bank’s Art Advisory and Finance Group.
Many lenders will accept other tangible assets as collateral as well. Tom Clarke, U.S. head of capital advisory at J.P. Morgan Private Bank, says this can include gold bars and private jets that clients own outright
Lenders for their part are encouraging the trend. U.S. Bank’s Ascent Private Capital Management, whose clients have at least $50 million in net worth, says it’s building a program around art-backed loans that it plans to launch next year. (It currently considers art loans on a case-by-case basis.) And PNC Wealth Management says it has been talking to its clients more about loans secured by investment portfolios as an alternative to mortgages.
Lending thresholds vary, but if the loan is being secured by an investment portfolio, clients can borrow up to 95% if that account is comprised of cash, up to roughly 85% if it’s bonds and up to roughly 75% with diversified stocks. With art, most lenders will provide up to 50% of a work’s appraised value.
Still, these secured loans carry significant risk. Interest rates are mostly variable, potentially exposing the borrower to rate increases. Borrowers typically get one to three years to repay—though they can apply to renew the loan. Monthly payments are often interest only, and at the end of this period borrowers have to be prepared to pay the entire principal balance. If borrowers are suddenly unable to pay, they could be at risk of losing part or all of the asset, though most lenders say they’ll look for solutions to avoid this situation.
Other things to consider:
Some loans can be subject to margin calls: If a chunk of a borrower’s investment portfolio is wiped out by market losses, the lender could require the borrower to pump more money into the account to lower his loan-to-value ratio.
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