Lombard Loans in Switzerland FAQ

1. What is a Lombard loan?

A Lombard loan is a loan or line of credit which is collateralized by underlying assets. You retain full ownership of the asset which you pledge as long as you are able to meet interest payments and possible amortization payments.

2. What kinds of Lombard loans are offered?

Typically, Lombard loans are revolving lines of credit which can be drawn on and repaid at any time. The line of credit is linked to the collateral value of your securities, and may increase or decrease along accordingly. You pay interest based on the portion of the line of credit used and the number of days over which you use it. Interest rates are typically variable.

Lombard loans with fixed loan amounts, interest rates and loan terms (12 months, for example) are also offered, as are loans with fixed terms but variable interest rates. Lombard loans with flexible lines of credit but fixed loan terms are offered by some lenders.

Some lenders offer Lombard loans which are pegged to a money market index (the LIBOR, for example). In this case, the interest rate is typically composed of the variable index plus a fixed markup.

Both personal and business Lombard loans are offered. In addition to CHF-denominated Lombard loans, Lombard loans denominated by EUR, USD, GBP, JPY and other currencies are offered by some lenders.

3. What kinds of assets can be used as collateral?

Most Swiss banks and stock brokers only accept securities like stocks and bonds as collateral for Lombard loans. A few banks and specialized dealers accept other assets like precious metals, fixed deposits, account balances or cryptocurrencies. As a general rule, lenders only accept securities which are held in their custody accounts.

The size of the Lombard loan in relation to the value of collateral (loan-to-value ratio) is determined by the lender based on: the type of securities you hold (i.e. bonds, stocks); the liquidity of the security; the creditworthiness of the security’s issuer; the currency in which the security is denominated; the volatility of the security. Banks may also reject Lombard loan applications if your securities bear too much risk.

The loan-to-value ratios used for Swiss Lombard loans are typically between 70 and 80 percent. Example: If a bank uses a 70 percent loan-to-value ratio and you hold securities with a combined value of CHF 100,000, your Lombard loan or line of credit could be as high as CHF 70,000.

4. What are the requirements for getting Lombard loans?

Because Lombard loans are collateralized by your securities, the creditworthiness of the issuers of your securities are more important than your personal creditworthiness.

Minimum portfolio diversification requirements (3 different securities, for example) may also apply.

5. What do Lombard loans cost?

Annual interest rates for Lombard loan lines of credit typically range from 3 to 5 percent between Swiss banks and brokers. Fixed Lombard loans may have annual interest rates as low as 1 percent.

Some lenders use different interest rates for different kinds of securities. For example, you may get a higher interest rate with a stock portfolio than with a bond portfolio.

Other costs may apply in addition to interest. Some banks charge ongoing adminsitrative fees based on average credit used (0.25 percent per quarter, for example). Some lenders charge one-time signing fees (200 francs, for example).

If you expect to use Lombard loans frequently, Lombard loan interest rates and additional costs should be a consideration when choosing a broker or custodian bank.

Other relevant costs to consider are brokerage fees and custodial fees. You can compare these using the interactive online trading comparison.

6. What are the disadvantages of Lombard loans?

Lombard loans must be collateralized over their lifespan. When securities lose value, their collateral value goes down accordingly. If at any point your securities no longer provide sufficient collateral value to meet loan-to-value requirements, the bank or broker can force a sale of your securities (see: margin call). You will owe any remaining amount not covered by the proceeds.

Unexpected events can quickly result in a temporary collapse in the value of securities, so using a maximum of 20 to 30 percent of your Lombard loan line of credit is recommended.

Another disadvantage is that the minimum sizes for Swiss Lombard loans are high. Depending on the bank or broker, the minimum Lombard loan size can be as low as 10,000 francs or as high as 250,000 francs. The most common minimum Lombard loan is 50,000 francs. You need to have enough securities to collateralize the loan.

For example, if a Lombard loan has a minimum loan size of 50,000 francs and a 70 percent loan-to-value ratio, you will need to hold at least 71,429 francs worth of eligible securities to be eligible.

A further disadvantage of using Lombard loans for trading is that tax offices may consider this an indication that you are trading on a professional basis. You can get informed about the tax differences between private and professional investors in the guide to Swiss taxes on securities.

7. What are the advantages of Lombard loans?

The main advantage of Lombard loans is that they let you leverage the value of your securities to access financing while continuing to benefit from capital gains, dividends and coupons.

Another advantage is that it is possible to receive a Lombard loan within as little as 1 hour of applying.

Tax deductions for interest charges on loans are another possible advantage.

8. Can Lombard loans be used for trading?

Flexible Lombard loan lines of credit can be advantageous for day traders because they provide liquidity during trade settlement cycles.

Example: You sell a stock on an exchange which has a three-day (T+3) settlement cycle. You can draw on a Lombard loan secured by your remaining investment positions to continue trading until your sale clears and you can repay the Lombard loan.

Lombard loans are often marketed as tools to finance investments above what your cash would allow. Doing this requires high risk tolerance and capacity. Lombard loans cost money and there is no sure way to know how the value of the purchased securities will develop.

9. Can Lombard loans be used in place of personal loans?

If you hold a significant amount of quality securities, Lombard loans can provide an alternative to personal loans.

With annual interest rates as low as 1 percent, they are generally cheaper than personal loans. They can be approved quicker than personal loans, which have a 2-week waiting period. Another difference is that with Lombard loans, the collateral value of your securities is more important than your personal creditworthiness.

Personal loans, on the other hand, are a more stable financing instrument because your loan is not exposed to stock market fluctuations. You can compare Swiss personal loans here.

Some banks and brokers restrict the use of Lombard loans to trading. In this case they are not a viable alternative to personal loans.

10. Which Swiss banks and brokers offer Lombard loans?

Most Swiss banks which provide stock brokerage services offer Lombard loans. Examples include Bank Cler, most cantonal banks, Cash (Bank Zweiplus), Cornèr Bank (Cornèrtrader), Credit Suisse, Migros Bank, Raiffeisen, Swissquote. Many private banks, including Julius Bär and Vontobel, also offer Lombard loans.

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