Lombard loan from Paraguay: borrowing without selling your portfolio
A Lombard loan, or securities-backed loan, is based on a simple idea: instead of selling your assets to get liquidity, you use them as collateral and borrow against them. The portfolio remains invested and continues to generate returns, while you have access to cash.
For a Paraguayan tax resident, the benefit is immediate. A loan is not income: receiving a $200,000 loan does not trigger any taxation, as it is a debt and not a gain. You therefore gain access to liquidity without selling, and thus without realizing capital gains, while territoriality keeps local taxation of foreign portfolio income at zero.
It's a powerful tool. It also involves leverage, with all that implies: a mechanism that amplifies gains also amplifies losses, and the lender has the right to sell your assets without your consent. This guide explains how it works, its real cost, and its risks. It does not recommend anything and does not constitute investment advice.
The Mechanism
You hold a portfolio of securities with a broker or bank: index funds, stocks, bonds. This portfolio becomes the collateral for the loan.
The lender determines a loan-to-value ratio, generally between 50% and 70% depending on the portfolio's composition. A basket of broadly diversified index funds qualifies for a high ratio, a single stock for a much lower ratio, and quality bonds for an even higher ratio. The margin the lender retains protects them from a decline in asset values.
You then receive the funds, often within a few hours from an online broker, where the mechanism is even automatic: any withdrawal beyond your available balance turns into a margin loan. Your securities, meanwhile, remain untouched. You retain ownership, receive dividends and coupons, and unrealized capital gains continue to accumulate.
The loan is generally for an indefinite period, with no maturity date or early repayment penalty. You repay when you wish, by contributing cash or by selling a portion of the portfolio.
What it really costs
The rate is variable and follows a reference rate, plus a declining margin depending on the amount borrowed. For a dollar loan of a few hundred thousand, the rate is commonly in the range of 5.5% to 7% per year. Loans denominated in euros are slightly cheaper, and those in Swiss francs significantly cheaper.
Two points are consistently underestimated. First, this rate changes: between 2021 and 2023, the cost of a dollar margin loan increased from approximately 1.5% to nearly 7%. What was largely profitable became marginal in eighteen months. Second, interest is most often capitalized, meaning it is added to the debt instead of being paid. The debt therefore grows on its own, and it grows faster as the rate is higher. Over ten years at 6%, an unpaid debt almost doubles.
The relevant calculation is therefore not "the portfolio returns 8%, the loan costs 6%, I earn 2%." It is: for the entire duration I carry this debt, will my portfolio's return exceed a rate that can rise, on a debt that increases by itself?
The Margin Call, the real issue
This is where a Lombard loan ceases to be a liquidity facility and becomes a risk.
If your portfolio declines, the debt remains unchanged, but the collateral shrinks. The ratio deteriorates on both sides simultaneously if interest capitalizes during this time. When the threshold is crossed, the lender demands a cash or securities contribution. Failing that, they sell your assets.
An example makes this concrete. A portfolio of $500,000, a loan of $250,000, for a ratio of 50%. The market drops by 30%: the portfolio falls to $350,000, the debt remains at $250,000, and the ratio climbs to 71%. If the lender's threshold is 70%, you must contribute approximately $38,000 within a few days. Otherwise, the lender sells part of your securities at their lowest point. The loss becomes permanent: when the market recovers, you hold fewer assets to benefit from it.
Three clarifications that most sales presentations omit. With an online broker, there is often no phone call or delay: liquidation is automatic, immediate, without consent. A private bank will generally handle the matter through a relationship and a response time, which is a difference in kind, not in degree. Secondly, the lender can unilaterally raise its margin requirements, and it does so precisely when volatility increases, i.e., at the worst time for you. Thirdly, since the loan is for an indefinite period, it is also revocable: nothing obliges the lender to maintain the line.
The Discipline That Changes Everything
The only real protection is a low ratio, well below what the lender allows. At a 25% ratio, with a trigger threshold of 70%, the portfolio can lose approximately 64% of its value before a margin call. This is more than the maximum decline observed during the 2008 crisis, which was around 55% for major global indices. At 35%, the safety margin drops to approximately 50% of tolerated decline, which remains comfortable without being foolproof. At 50%, an ordinary 30% correction is enough to trigger a forced sale.
Portfolio diversification is at least as important. Collateral concentrated in a few securities can lose 40% in a few sessions, whereas a diversified global basket almost never does. A prudent ratio and diversified collateral complement each other; neither is sufficient on its own.
Taxation in Paraguay
| Event | Treatment |
|---|---|
| Receipt of borrowed funds | No taxation. A loan is not income but a debt. Neither personal income tax, nor corporate income tax, nor VAT. |
| Interest paid to the lender | Not deductible for an individual for personal income tax purposes. A Paraguayan company borrowing for its business activities, however, could deduct these expenses from its profit, under the usual conditions. The cost of the loan is therefore a net cost of tax advantage for an individual, and this point should be verified with your accountant based on your situation. |
| Portfolio income during the loan | Unchanged. Dividends, coupons, and capital gains from foreign sources remain at 0% due to territoriality. The loan does not alter the asset regime in any way. |
| Repayment | Not taxable in itself. If you repay by selling securities, the sale follows the usual regime, so 0% for foreign assets. |
The "buy, borrow, die" scheme
The logic taken to its conclusion is what Anglo-Saxon literature calls buy, borrow, die. Assets are accumulated, and their capital gains remain unrealized, thus untaxed. Rather than selling to live, one borrows against these assets, which triggers no taxation. Upon death, the assets pass to heirs, and Paraguay applies no inheritance tax. The debt is repaid by the estate, if necessary by selling a portion of the portfolio.
The scheme indeed works well in a country with no inheritance tax and no taxation of foreign capital gains. However, its limitations must be considered. It assumes that the portfolio's return consistently exceeds the cost of debt for decades and through interest rate cycles that no one predicts. It also assumes that the portfolio never experiences a deep enough decline to trigger liquidation, which becomes a fragile assumption as capitalized debt grows. And it is only beneficial if the heirs are not taxed elsewhere: if your children reside in France, French inheritance rules will apply to what they receive, which the deceased's Paraguayan residency is not always sufficient to avoid.
In other words: the mechanism is real, but it relies on a chain of assumptions, and each link can break.
Three Defensible Uses
Financing a local real estate purchase
This is the most solid case. An expatriate with a $400,000 portfolio who wishes to acquire an apartment in Asunción for around $120,000 can borrow this amount, representing a 30% ratio, rather than selling their securities.
Two reasons justify this. First, the comparative cost: a bank mortgage in Paraguay is negotiated at significantly higher rates, in local currency, when available, which is rarely the case for a recently settled foreigner. Second, the opportunity cost: selling $120,000 in securities means definitively giving up the future return on that sum.
The trade-off to accept: you now hold an illiquid asset, the apartment, financed by a debt backed by a liquid asset that can be sold against your will. In the event of a simultaneous crisis in the markets and in local real estate, you will not be able to sell the apartment quickly enough to meet a margin call.
Seizing an opportunity within a short timeframe
A seller demands payment within forty-eight hours, while an international transfer takes five days. A credit line backed by the portfolio bridges this gap for a few hundred dollars in interest, with repayment as soon as funds arrive. This is the least risky use of all, because it is short, small, and repaid.
Supplementing income without selling
A retiree with a substantial portfolio and a pension covering most of their expenses can borrow a few thousand dollars a year rather than selling securities each month. At this level, the ratio remains below 2% and the risk of a margin call is theoretical.
Prudence, however, dictates stating what the original message omitted: this debt grows each year, through new drawdowns and capitalized interest. It never repays itself. Over twenty years, with lower-than-expected returns or higher rates, the debt can become a significant part of the inherited wealth. The scheme holds as long as the portfolio grows faster than the debt, and this condition must be checked annually, not once and for all.
The case of borrowing in foreign currency
Borrowing in a low-interest currency rather than in dollars mechanically reduces the interest burden, sometimes by several points. This is a carry trade operation, and it involves full exchange rate risk: if the borrowing currency appreciates, your debt increases in the currency of your assets, and this increase can wipe out several years of interest savings in a few weeks.
The most telling precedent remains the abandonment of the Swiss franc floor in January 2015, which saw the currency appreciate by around 20% in a single session. Borrowers who thought they were saving three points lost it several times over in one day. The prudent rule is to borrow in the same currency as your assets and your income: the hedge is then natural and free.
The six rules not to break
- Cap the ratio at 25 or 30%, even if the lender allows double. The displayed borrowing capacity is not a recommendation; it is the maximum beyond which the lender protects itself.
- Never borrow to speculate. Using leverage to buy volatile assets exposes you to a double penalty: the financed positions lose value at the same time as the collateral, and liquidation happens faster than you can react.
- Keep a cash reserve outside the portfolio, around 10 to 20% of the borrowed amount, in a separate account. This allows you to meet a margin call without selling.
- Diversify the collateral. A concentrated portfolio transforms a single stock incident into a general liquidation.
- Monitor the rate. It is variable and can quadruple in two years, as has happened recently. When the cost of debt approaches the expected return of the portfolio, the operation no longer makes sense and you should repay.
- Borrow in the currency of your assets. The interest savings from borrowing in a third currency are a disguised currency bet.
Conclusion
The Lombard loan answers a precise question and answers it well: how to obtain liquidity without selling assets that one wishes to keep. For a Paraguayan resident, the answer is particularly clean, since the loan is not taxed, nor is the portfolio income, and no inheritance tax closes the story.
But it's not free money. It's a variable-rate, capitalized debt, backed by assets that the lender can sell at their discretion and at the worst possible time. Used wisely, with a low ratio, diversified collateral, and a reserve on the side, it's a cheaper financing tool than most credits available from Paraguay. Used poorly, with a high ratio and a concentrated portfolio, it's the mechanism by which an ordinary market correction turns into a permanent loss.
The question to ask before borrowing is therefore not "how much can I get," but "what happens if my portfolio loses half its value while I carry this debt." If the answer is comfortable, the tool has its place in a wealth architecture, alongside the other components we detail in our guide to a lean family office from Paraguay. If not, the loan is too large.
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