How to Use Government Bonds as Collateral for a Mortgage Loan

You can borrow against your government bonds to fund a down payment.

You can borrow against your government bonds to fund a down payment.

Government bonds are widely recognized as low-volatility, low-risk securities. Lenders readily accept them as collateral for a loan. However, because lenders only accept cash contributions for down payments on mortgage loans, you can fund your down payment by using the government bonds in a loan from a third party, either a stock brokerage or, in a separate transaction, your bank or credit union.

Mortgage Loan Requirements

Lending institutions do not normally accept anything other than cash for the buyer's down payment on a mortgage loan. Certain mortgage loan programs require the traditional 20 percent down payment. However, the New York Times says that according to an American Enterprise Institute National Mortgage Risk Index from October 2013, about half of all home mortgages are obtained with a down payment of 5 percent or less. To use government bonds for your down payment, although you cannot pledge them to the lender directly, you can keep the bonds, borrow against them in one of several ways, and use the cash to fund your down payment.

Bonds in Margin Account

Most investors keep an account with a brokerage. If your account is a margin account, you can simply withdraw funds from the account to fund the down payment. For government bonds, you can withdraw 80 percent of the value in the account. The brokerage charges interest on the amount withdrawn and requires you to maintain in your account equities worth at least 20 percent of the total value of bonds, plus withdrawn cash. Your brokerage charges margin interest on the account during the time funds are borrowed. In most cases, margin interest runs from 6 to 8.5 percent annually.

Funds in Cash Account

If your brokerage account is a cash account -- an account not set up to allow you to borrow against the value of the equities in your account -- you may or may not be able to convert it to a margin account. If the account is not a retirement account, you can phone the brokerage and ask that they switch the account over to a margin account. This usually takes only a day or two. Retirement accounts, however, are not marginable.

Government Bonds You Hold

If you hold the government bonds yourself, you can either open a margin brokerage account, put the bonds in the account, then borrow against them, or you can borrow from a bank using the bonds as collateral. In many instances, it may be easier to open up a margin account and borrow against the bonds in the account than to get a bank loan using the government bonds as collateral. Liquidating the bonds, should you later need additional cash, is generally easier when they are already in a brokerage account.


About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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