Lombard Loans in Switzerland Explained

Many people who hold substantial amounts of wealth in investments still turn to personal loans to finance a vehicle purchase or to bridge liquidity gaps. But compared to personal loans, using a Lombard loan can be much more affordable.

What is a Lombard loan?

A Lombard loan, also known as a margin loan, is a type of secured loan that is offered by many Swiss banks and stockbrokers. Lombard loans are secured by stocks, bonds, ETFs, currency, precious metals, and certain other assets that you pledge to the bank as collateral. Each bank has its own rules about which assets it accepts as collateral, but highly-liquid stocks, bonds, and ETFs are generally accepted.

In order to qualify for a Lombard loan, you first need to have a custody account at the same bank.

When can using a Lombard loan make sense?

If you hold securities and other assets, then getting a Lombard loan can be a cheaper alternative to getting an unsecured personal loan.

Lombard loans that give you a line of credit have the added advantage of enabling you to borrow and repay money at any time, as you see fit, without the two-week waiting period that applies to personal loans. You also have more flexibility because there is no fixed schedule for paying off a loan.

Which kinds of Lombard loans are there?

Lombard loans generally fall into two different categories. Banks may offer just one type of Lombard loan, or they may let you choose between the two. In both cases, the loan is credited to your bank account or stock brokerage account. You can then withdraw or transfer the money as needed.

• Line of credit: You receive a flexible line of credit collateralized by the value of your investments. You only have to apply once. After your line of credit has been approved, you can borrow against it whenever you choose to, with no minimum loan size. You can decide how long you want to carry the loan, and you can pay back any part of the loan at any time. The bank only charges you interest for the actual amount you borrow, and the time over which you carry the loan. The interest rate is not fixed, as it is with personal loans, but can change at any time.
• Fixed loan: The bank gives you a loan for a fixed amount with a fixed loan term. The available loan terms vary between banks. The loan is secured by the value of your investments. Typically, there is a minimum loan size, and this can be relatively high (100,000 francs, for example). Typically, the interest rate is fixed for the duration of the term.

How much do Lombard loans cost?

The annual interest rates applicable to Lombard loans are generally much lower than those of personal loans. That is because a Lombard loan is collateralized by assets that the bank can seize to repay the loan, whereas a personal loan is typically granted based on your creditworthiness alone.

Unlike personal loans, which must account for all standard fees in their interest rates, Lombard loans may come with administrative fees, depending on the bank. Many Swiss banks charge ongoing administrative fees (0.25 percent of the average loan, for example) for Lombard loans with lines of credit. Some banks charge initial one-time fees when you first get the loan.

The table below provides an overview of annual interest rates and administrative fees for Lombard loans from a selection of Swiss banks. Many other Swiss banks set their interest rates on a case-by-case basis, depending on which investments you hold, your personal creditworthiness, and the loan-to-collateral ratio you choose.

What are the risks of Lombard loans?

Before even considering using a Lombard loan, it is important to understand the risks. The value of stocks, ETFs, and other assets can fluctuate heavily over time. If the value of your assets falls to where it no longer covers the required collateral, then the bank will issue a margin call. In this case, you will have two options:

• Transfer additional money or other assets into your account to make up for the deficit in collateral. This is not always an option, as some banks require you to accept the creation of a stop-loss order when you are approved for a Lombard loan. The stop-loss order triggers a market order as soon as the collateral becomes insufficient, so that all or part of your assets are automatically sold to repay the outstanding loan.
• Repay part of the loan so that the remaining debt is fully collateralized.

In order to minimize the risk of a margin call, many Swiss banks use conservative loan-to-collateral ratios for Lombard loans. Each bank has its own ratios. The loan-to-collateral ratio can also vary depending on which investments you hold. For example, the same bank may lend you an amount equal to as much as 80 percent of the value of your bonds, but only 60 percent of the value of your stocks and precious metal, which are more volatile.

It is important to understand that there is no way to predict future developments in markets. There is always a chance that the value of your assets will fall to where your loan is no longer fully collateralized (in the case of a market crash, for example). You can reduce the risk by following these two guidelines:

• Ideally, the assets that you pledge as collateral for Lombard loans should be highly diversified, as this reduces the risk of extreme volatility. Examples include stock ETFs that track global stock indexes, and diversified bond ETFs. 
• Avoid borrowing an amount equal to more than 20 percent of the value of your assets. This greatly reduces the risk of a margin call.

Are variable interest rates a risk?

In the case of Lombard loans that are provided as a flexible line of credit, there is an additional risk because interest rates are not fixed. Most Swiss banks base their variable interest rates on an underlying money market index, to which a markup is added by the bank. An unanticipated change in the underlying index can substantially increase the cost of your loan. 

For this reason, it can be beneficial to calculate the cost of loans using a higher interest rate, and budget accordingly. If you do not end up needing the surplus money for interest payments, you can use or invest it in other ways.

Which currencies are Lombard loans offered in?

In addition to Swiss francs, many banks in Switzerland also offer Lombard loans in euros and US dollars. Some offer Lombard loans in additional currencies. The interest rates for Lombard loans in other currencies can differ from those for Lombard loans in Swiss francs.  

Are Lombard loans only offered by banks?

In addition to banks, loans secured by assets are also offered by some other service providers. For example, some precious metal dealers offer loans that are collateralized by your gold or other precious metals held in their custody. There are also cryptocurrency service providers that offer loans secured by cryptocurrency assets you entrust to them.

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