What is a Pledge Mortgage Account?

A Pledged Asset Mortgages, also referred to as Asset Backed Mortgage or Asset Integrated Mortgages are specially designed for those who have enough money to make monthly payments on a home, but have all their ready cash locked up into some sort of investments, such as stocks, bonds, or mutual funds. Depending on the lender you can use almost any type of investment. It’s very helpful because the borrower can make the down payment without having to remove investment funds, allowing them to continue in growth... or decrease in value.

Here’s how a Pledged Asset Mortgage works:

You buy a new home for $250,000. The down payment on the home is 20%, or $50,000. You don’t have nearly that in cash on hand but you do have $100,000 in stocks and Certificates of Deposit. You can use these investments to cover as collateral for the down payment.

This sort of loan is excellent if the money you have invested is expecting a higher return than the interest rate of the loan, or when the assets you are backing could cause you capital gains income tax grief if you were to convert them to cash.

Benefits of Pledged Asset Mortgage

• Don’t have to make big down payment
• You continue to own the investments used as collateral and make any interest or profit that they generate
• In many cases the borrower can avoid having to take out mortgage insurance on the loan
  

Disadvantages of Pledged Asset Mortgages

• If you default on the loan the lender gets both the assets you pledged and the house
• You must keep in mind that since you have not actually paid the down payment, but are rather holding collateral against it, it is still money you owe, and you will be charged interest on it.
  

Is this mortgage really worth it?

You should weigh the amount of interest you are making on your investments with the amount of interest you are paying towards the loan. If your investments bring in less than the interest it might be worth it to sell the investments and make the down payment.

How much can I pledge?

The amount a borrower can pledge towards the loan depends on the mix of investments he/she has in the portfolio. If the borrower has a conservative portfolio he/she could most likely pledge up to 50% of the portfolio’s value. A borrower with a risky portfolio would have a lower pledge limit.

When is the best time to get a Pledge Account Mortgage?

The smartest time to get a Pledge Account Mortgage is when during a Bull Market, when stocks are rising, and during a time when real estate prices are relatively stable.

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