Lombard loan instead of mortgage: When pledging securities can be the better option

How a Lombard loan works in Switzerland

The Lombard loan is a bank loan secured by pledged securities. Investors deposit shares, bonds, fund units or structured products in a securities account and receive a credit line which they can use flexibly. In contrast to a mortgage, there is no land register entry, no mortgage certificate, and no complex credit assessment as with classic consumer financing. The bank relies on the easily realizable collateral at any time, and the credit facility can be set up within a few days.

The credit facility is usually structured as a revolving credit line. You draw what you need, and interest is charged only on the amount utilised. Usually, Lombard loans do not have repayment plans; repayment is by arrangement or at the end of the contract term. This makes them particularly suitable for temporary financing needs, for instance, when a tax bill must be settled in the short term or a property is to be acquired before another is sold.

Lending values: What banks accept for which investments

Not every security is lent against at the same amount. Banks work with individual loan-to-value ratios that reflect the price risk. For Swiss government bonds and top-rated franc-denominated bonds, 80 to 90 percent of the market value is often counted, and for broadly diversified bond funds, 70 to 80 percent. Liquid blue-chip shares from the SMI or major foreign indices are usually lent at 50 to 70 percent, while small caps and emerging market stocks are significantly lower. Structured products, hedge funds, or single positions with high concentration risk often receive no lending value at all.

A portfolio of CHF 500,000, consisting half of Swiss blue chips and half of a bond fund, will roughly yield a credit line of about CHF 300,000 to 350,000. The broader and more liquid the portfolio, the higher the available facility. If you concentrate everything on one security, you must expect a significantly lower lending value; many institutions also reduce the rate as soon as a single position makes up more than 25 to 30 percent of the portfolio.

Lombard loan or mortgage: When each solution fits

In conversations with mortgage advisors, the Lombard loan often comes up as an alternative or supplement to a fixed-rate mortgage. The most important differences concern speed, flexibility, and costs.

Lombard loan: No notarisation, no land register entry, no property valuation. The facility is set up within days and can be repaid at any time. However, interest rates are variable and generally higher than with a mortgage.

Mortgage: Lower interest rates, plannable terms of up to ten or fifteen years, tax advantages through the imputed rental value. However: more time-consuming formalities, mortgage certificate and notary fees, limited flexibility for early repayment.

Those seeking long-term property financing are generally better off with a mortgage or a mix of fixed-rate and SARON mortgages. For a short-term bridge, a tactical investment opportunity, or settling a one-time large bill, the Lombard loan is often the more suitable instrument.

Typical areas of application for Swiss investors

In practice, the Lombard loan is used for very different purposes. It often serves as bridging finance when changing home ownership, for example, when the new property is to be occupied before the old one is sold. It is equally often used during construction or renovation, when tradesmen's bills need to be paid before the mortgage is increased.

Self-employed persons use it to bridge liquidity peaks without contractual negotiations with their main bank. In inheritance settlements, it can be used to make payouts to co-heirs without liquidating the securities portfolio and possibly realising unfavourable capital gains. Investors with a higher risk tolerance also use the Lombard loan to leverage investments, that is, to buy more securities on credit. However, this strategy is only recommended for experienced investors with adequate risk capacity.

Terms and interest rates

Interest rates for Lombard loans in Switzerland are tied to short-term money market rates, in practice to SARON. Surcharges of between 1.0 and 2.5 percentage points above the reference rate are common, depending on the bank, credit volume, and portfolio quality. With a SARON close to zero percent, loan interest rates are currently between roughly 1.5 and 3 percent. If the Swiss National Bank’s key interest rate rises, Lombard loan rates rise immediately—a risk of interest rate changes that does not exist with a fixed-rate mortgage.

Processing fees are not charged by most cantonal and major banks; smaller private banks may charge a commitment fee on the unused facility. If you maintain the loan only as a reserve, this should be clarified in advance.

Margin call: Understanding the central risk

The biggest difference compared to a mortgage is the market risk of the collateral. If the prices of pledged securities fall, the lending value drops. If the outstanding debt comes close to or exceeds this threshold, the bank calls for additional collateral. This margin call usually occurs in Switzerland with a short deadline, typically 24 to 72 hours. If you cannot provide additional collateral or partially repay the loan, you are forced to sell securities—often at the worst possible time.

This scenario is not theoretical. During the market crash in spring 2020 or the correction in 2022, numerous Lombard loans were liquidated through forced sales, causing investors to realize their book losses. Anyone using a Lombard loan should draw the facility well below the maximum possible amount—a usage of no more than 50 to 60 percent of the collateral value is considered conservative. A stress test assuming a price drop of 30 to 40 percent is part of the necessary homework before signing a contract.

Tax aspects

Interest on a privately used Lombard loan is deductible from taxable income in Switzerland, just like other interest, up to the level of taxable investment income plus CHF 50,000. If the facility is used to purchase securities, the interest deduction often applies in full. If the loan is used to purchase real estate, the treatment depends on the purpose and cantonal rules. For business use, the regulations for commercial loans apply.

Important: The debt also reduces taxable assets, which can have a noticeable effect in cantons with high wealth taxes such as Geneva, Vaud, or Basel-City. A specific calculation should be made with a tax advisor or fiduciary before signing the contract.

Practical tips before taking out a Lombard loan

Before opening the facility, it is worth taking a sober look at a few points. First, the portfolio should be sufficiently diversified so that a price drop in a single position does not immediately threaten the facility. A stress test with a market crash of at least 30 percent provides an honest risk assessment.

The loan-to-value should be chosen conservatively. Using the maximum facility leaves no buffer for market movements. It also makes sense to compare the terms offered by several banks—the range of surcharges is considerable, and private banks in particular are open to negotiation.

Clarify the margin call terms in writing in advance, including the deadline, means of communication, and definition of the trigger threshold. Keep the facility as a tactical instrument, not as a permanent source of funding. Using a Lombard loan to the full over many years means paying considerably more interest than with a properly structured mortgage, and taking on market risk besides. Finally: liquid securities that serve as collateral should not also be earmarked as short-term reserves. Separate liquidity planning protects against unpleasant surprises.