Securing Mortgage with Government Bonds​

Tablet, work sheet and a pen on the table

    In securing mortgage with government bonds, which are widely recognized as low-volatility, low-risk securities. Lenders readily accept them as collateral for a loan when enlisting for government bonds.

   However, because lenders only accept cash contributions for down payments when procuring government bonds with 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.

    A collateral trust bond is a bond that is secured by a financial asset such as stock or other bonds that is deposited and held by a trustee for the holders of the bond. The bond is perceived as a safer investment than an unsecured bond since the assets could be sold to pay the bondholder, if necessary.

    A collateral trust bond is a type of secured bond, in which a corporation deposits stocks, bonds, or other securities with a trustee so as to back its bonds. The collateral has to have a market value at the time the bond is issued that is at least equal to the value of the bonds and the value of the collateral is periodically reassessed to make sure it still matches the value initially pledged.
If over time, the value of the collateral falls below the agreed-upon minimum, the issuer has to put up additional securities or cash as collateral, such kind of bond is considered safer than an unsecured bond; however, the trade off with greater safety is a lower yield and therefore lower payout.

    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.

    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 The brokerage charges interest on the amount withdrawn and requires you to maintain in your account equities worth at least 20 percent of the total value of bonds, plus withdrawn cash.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.

    With a cash account setting up will 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 margin-able.

    Also 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.Securing Government Bonds