Can you use shares as equity for a home loan?

When assessing mortgage applications, lenders look at your income, expenses, savings and many other factors to determine if you can afford the repayments. 

While most lenders will be mainly concerned with your primary source of income, such as the wage or salary you earn from your job, they’ll also consider other income sources. This includes any dividends you may earn from your share portfolio. As this income may fluctuate over time, a lender may only consider a percentage of the total.

As part of the home loan application process, lenders will see genuine savings as a positive, and they’ll want to see regular deposits into a savings account. Dividends from your share portfolio could also count as part of your genuine savings, such as if you’ve held this money for at least three months.

However, most lenders won’t allow you to use your shares as a deposit or security as part of your mortgage application.

Unfortunately, most lenders will not accept the shares you have invested in as a part of your deposit, regardless of their current worth. This is because share prices fluctuate, so their value cannot be estimated with certainty.

The only way you can use something other than cash for a deposit is by using equity held in another property. These methods of paying the deposit are acceptable because they minimise the lender’s exposure to risk.

If you do want to use your shares to help pay your home loan deposit, the most obvious tactic is selling your shares. Once sold, you can then use the sale proceeds to help finance the deposit. If the value of your sold shares equals 20% of the property's value, you may be able to avoid the cost of lender’s mortgage insurance (LMI). Of course, the lender may need you to hold this money for 3 months or longer to consier it "genuine savings."

However, share prices are unpredictable. If they happen to be on the lower side when you’re considering selling them, you may not be able to raise the amount you need.

You may instead want to consider other options like margin loans that allow you to borrow money to expand your investment portfolio. The money you borrow can help you diversify your portfolio, especially in an underperforming market, and potentially enjoy more returns on your investment when the market improves. The money you make could then be used towards your home deposit.

However, even the most experienced investors cannot accurately predict the direction of the market. The value of your investment could fall at any time, depending on the market forces at work. ​Having a margin loan when the market changes could put you at risk of losing your portfolio entirely, which would hurt your financial position significantly.

It’s worth understanding the terms of a margin loan and the risks it involves before you apply for one.