Using Gold as Additional Collateral to lower interest. Does this exist?

4 Replies

All,

I'm always thinking about ways to creatively finance property, and this idea came to my head while I was driving home. I tried using Google to find a comparable example, but I was unable to track one down. 

I am always in the market to purchase more investment properties to rent out, but I want my interest rate to be as low as possible. Is it possible to use gold coins (major ones like Krugerrands or American Eagles) as collateral to buy down the interest rate? Just to clarify, I am not using the gold as part of the down payment. I have a lot of gold bullion that I would like to keep as an investment but since it does not generate any cash flow, I would like to put it to work for me. 

What I am essentially trying to accomplish here is transferring more of the risk over to my side of the fence while keeping the collateral in my portfolio. As the underwriting institution, I feel like this would be a valuable proposition since the upside if quite huge in case I default on the loan. 

Does this type of loan exist? If it does, what is the realistic amount I could expect to shave off of the interest rate and what amount of gold would I have to put down in order to shave off the aforementioned points worth of interest? Just so we have a reference point, let's say the property is valued at $150,000 and I put down 20%. The loan would be a 30 year investment type mortgage for $120,000 at 4.5%. 

Hey @Justin Moon  - I tried looking at this idea from a few angles and am not really seeing why this would appeal to a lender.  You're offering up an asset that has a fluctuating and very unpredictable price with no income generation while the remainder of the loan dynamics do not change at all.  You're now asking a lender who has spent years understanding the risk profiles of borrowers and rental properties to learn how to trade in gold or understand it enough to lend based on it.  What collateral would they actually get?  If these are gold coins you've got in your basement then they'd have no way of knowing if you went out and sold it all off the day after closing.  The only thing I can think of would be if you keep the gold at the bank without access to it until the loan is paid off.

On the surface it seems like an attempt to spread the risk of the loan or transfer some of the risk into a different asset class.  I think you'd be hard pressed to find a lender even remotely interested in considering such a setup, but the best way to find out would be to call a bunch of lenders and ask them.  The answer is always no if you don't ask.

There are small banks that do portfolio lending, and I know one was offering me a loan based on using non-real property as collateral AND they would hold the collateral so that if pledged it could not be liquidated (and thus leavie the loan uncollateralized).  So gold might be a consideration for collateral; but whether that would "buy down" the rate is something I can't say but I would guess not. After all they can actually get borrowers to pay points up front that the bank keeps in order to buy down the rate. 

Probably not. You could use the gold as collateral for a loan, possibly. Or you could sell the gold and buy gold ETFs or other securities, then obtain a margin loan to use for other purposes.

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