A buyer may find the right home in a new city before their current home is sold. The timing can be difficult, but the opportunity can make it necessary to quickly secure a down payment.
The instinct for most investors in that situation is to log into a brokerage account and sell shares. It feels clean and logical until you see the tax bill on the gains you just realized.
However, Fidelity outlines three ways investors can borrow against assets they already own rather than liquidating a portfolio when temporary cash is the goal.
Selling a highly appreciated position can trigger capital gains taxes and permanently interrupt future compounding, while borrowing preserves both.
Fidelity’s guidance suggests that for investors with a short repayment timeline, borrowing may compare favorably to selling once tax costs and foregone growth are weighed against loan interest.
Selling stocks can be more expensive than it looks
Long-term capital gains are taxed at 0%, 15%, or 20% at the federal level, depending on taxable income, according to IRSTopic No. 409.
High earners also face the 3.8% net investment income tax on top of that, as stated in the IRS Topic No. 559, pushing the combined federal rate to 23.8% before state taxes take effect.
Selling an investment that has doubled, tripled, or grown over many years also means paying taxes on those gains immediately. That reduces the amount of money that stays invested and continues to grow in the portfolio.
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Michael Mariani, vice president of lending solutions at Fidelity, noted directly in the firm’s guidance that while you’ll pay interest on the loan, you can weigh that cost against the potential growth you might see from the assets you’d otherwise sell.
The break-even comparison Fidelity highlights is whether the loan’s interest cost, compounded over the borrowing period, is less than the tax cost and the foregone growth from selling.
In many short-term scenarios, borrowing wins that comparison, according to Fidelity.
The three borrowing methods Fidelity outlines
Each of the three main ways to borrow against existing assets is designed for a different situation and type of collateral. Here is how they work and where they fit.
1. Home equity line of credit
A home equity line of credit, or HELOC, lets homeowners draw against the equity built up in their property without selling it.
The credit line stays open during a draw period, and borrowers pay interest only on what they actually use. This makes it flexible enough to allow buyers to purchase a new home before an existing home sale closes.
Charles Schwab points out a real planning issue, however. HELOCs take weeks to set up, meaning that a “bridge home-purchase” scenario may not actually be viable unless the borrower planned ahead.
2. Securities-backed line of credit
A securities-backed line of credit, or SBLOC, works similarly to a HELOC but uses eligible taxable investment accounts rather than home equity as collateral.
Fidelity says eligible borrowers may access up to 70% of their portfolio value, with rates generally comparable to or slightly below those of home equity loans, without annual fees in most cases.
3. Margin loan
A margin loan is also backed by securities in a brokerage account, but it is a more direct borrowing structure typically associated with active traders who want to amplify their buying power.
Fidelity notes that margin can also serve as a short-term liquidity tool for non-investment purposes, similar to how a HELOC might function for a homeowner who needs quick cash.
When borrowing strategies fit, and when they don’t
“In general, this type of leverage should be used when you’re confident you can repay the loan quickly,” Lou Gentile, advanced planner at Fidelity, said in the firm’s guidance.
That framing draws a clear boundary regarding who these strategies aim to serve. Fidelity suggests keeping $1,000, or three to six months of living expenses, in a liquid account as a baseline reserve.
Robert Bukowski, head of strategy and business development for lending solutions at J.P. Morgan Wealth Management, told the bank’s Insights team that borrowing to invest requires careful planning.
Make sure any borrowing plan also includes an exit strategy in a worst-case scenario. Leverage can multiply the pain of a downturn without proper planning.
Borrowing tools, Fidelity suggests, fit temporary needs with a clear repayment source, such as proceeds from a home sale, an expected bonus, or a stock option vesting.
The risks Fidelity flags for borrowers
All three strategies share a vulnerability: The collateral must hold its value. Whether the underlying asset is a home or a portfolio, the lender can take action if values fall enough to threaten the loan coverage ratio.
For investment-backed loans in particular, a sharp market decline can trigger a forced liquidation at exactly the wrong moment, creating the tax event the borrowing strategy was designed to avoid.
Fidelity recommends limiting how much you borrow relative to the maximum available credit line and diversifying the assets pledged as collateral as two ways to reduce the chance of breaching the minimum threshold.
Even with those safeguards, borrowing against a volatile portfolio in a volatile market is a different risk calculus than borrowing against a stable, diversified one. A borrowing strategy that pencils out over two months can look quite different stretched to 12 months.
Gentile’s guidance emphasizes borrowing only when repayment is foreseeable and imminent, requiring strict short-duration discipline. He warned that borrowing without discipline can become a recurring debt habit that erodes long-term investment returns.
Fidelity notes that a financial advisor can help assess whether a borrowing structure is appropriate for an investor’s situation.
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