Box Spreads: A Better Alternative to Mortgages

Mortgages are Expensive, Down Payments Require Liquidating Investments - Compromising Client's Financial Future 

This article is originally published in collaboration with Cboe.

Real estate is often a client’s largest purchase, requiring a mortgage with a significant downpayment. 

Tony is looking to buy a $2MM property in DC. With a $3MM portfolio, he could finance the purchase by paying 20% down, selling $400K of his portfolio, and taking out a $1.6MM mortgage. This is not ideal: Tony would face significant tax consequences, lose the upside potential of his investments, and pay for a ~7% mortgage. 

This is traditionally the case for clients financing the buying of real estate: They take out a mortgage at interest rates well above the Treasury rate and liquidate their investments to cover the down payment - forgoing potential gains while dealing with a larger tax liability. 

How SyntheticFi Box Spread Loans Beat Mortgages  

SyntheticFi helps your client use box spreads as an alternative financing tool to mortgages with better cost-efficiency for many clients. Box spreads are an exchange-traded options strategy that allows securities-backed borrowing at near-Treasury interest rates, while requiring zero cash down. Clients save money on interest rates, capitalize on additional interest deductions, and avoid liquidating assets. (To learn about how box spreads work, refer to this article.) 

By selling a Box Spread through SyntheticFi's platform, Tony can borrow money at near-benchmark rates. Using a 5-year Box Spread Loan, he can secure a tax-deductible 4.6% fixed rate for 5 years—with no down payment, so he can keep his full $3MM portfolio invested and working for him. 

If Tony dedicated to combine the box spread strategy with a jumbo mortgage, he would save over $200K in five years (more details below). Amazing!

Benefit 1: Lower Interest Rates

SyntheticFi helps your client trade a Box Spread on a listed exchange like Cboe, which provides price transparency and liquidity offered by a multilateral market. This avoids interest surcharges from custodial banks. As a result, SyntheticFi offers ultra-competitive interest rates, often just 20 bps above benchmark rates. (Latest quotes available here.) 

For Tony, compared to a 7% jumbo mortgage, he would secure a ~4.6% rate through Box Spreads - about 30 bps above the five-year Treasury Bill rate. 

Benefit 2: Deduct Interest as Capital Loss 

Unlike a mortgage where cash is paid to a bank, the “interest” on a SyntheticFi Box Spread Loan appears as a loss on the options trade. This makes the “interest” fully tax-deductible as a capital loss. 

“Fully” here means there is no cap. For comparison, mortgage interest is only deductible on the first $750K principal of qualified home loan debt—any interest paid on mortgages with a principal exceeding $750K is not tax-deductible. In contrast, the “interest” on SyntheticFi’s Box Spread loans is fully deductible with no limit. 

Under IRS Section 1256, box spreads on SPX options are subject to mark-to-market taxation at year-end. The accrued “interest” is deducted annually, even though the trade settles at expiration (e.g. in 5 years). The deductions of interest follow the IRS Section 1256, with 60% treated as a long-term capital loss and 40% as a short-term capital loss. (Refer to this article to learn more about the tax benefits.) 

To maximize tax efficiency, a SyntheticFi Box Spread loan can be combined with a jumbo mortgage. 

For his real estate purchase, Tony can take advantage of the combined tax deductions from this hybrid financing approach: 

• Mortgage Interest Deduction - He takes out a $750K 5/1 ARM at 7% APR, ensuring he qualifies for the mortgage interest deduction up to the IRS limit. 

• Box Spread Deduction - For the remaining $1.25MM, Tony takes out a SyntheticFi Box Spread Loan at 4.6%, generating an annual capital loss deduction. 

• By stacking the two deductions, Tony’s effective blended financing rate drops to 3.63% after tax—more than 2.45% lower than an after-tax 5/1 ARM, translating to ~$49K in annual savings. (This assumes 35% marginal income tax, 15% capital gains tax, and 10% combined state and city taxes.)

Benefit 3: No Need to Liquidate Investments - Stay Fully Invested With No Capital Gains 

Using SyntheticFi Box Spread Loans to finance real estate eliminates the need to sell assets for a down payment. This allows clients to stay fully invested without incurring a large capital gains tax. 

This has been particularly valuable in recent years, as a well-diversified portfolio has gained over 80% since 2020. By remaining fully invested, clients avoid unnecessary tax liabilities while continuing to participate in the bull market. 

Tony finds this especially useful, as his TSLA shares have risen over 10x. By deferring capital gains just on his holdings, he is delaying $35K in taxes—a big win! 

Qualification: Liquid Investments Required as Collateral. 

Instead of upfront cash, margin is required to withdraw the funds generated by a SyntheticFi Box Spread Loan. The exact requirements vary between Reg T margin accounts and Portfolio Margin accounts. Reg T margin typically allows a 50% margin release, 

For a $1.25MM SyntheticFi Box Spread Loan, Tony would require at least a $2.5MM portfolio as collateral. Fortunately, he has this covered. 

Clients with Portfolio Margin accounts may qualify for higher release rates. Portfolio Margin is a newer margin program that is available at many brokerage platforms, such as Charles Schwab. Unlike Reg T margin, which applies a fixed release percentage to each position, Portfolio Margin assesses overall portfolio risk. A well-balanced or hedged portfolio can significantly benefit from Portfolio Margin, often increasing the margin release to 85%. 

Risks: Hedged, Controlled, but Non-Zero 

A SyntheticFi Box Spread Loan itself introduces minimal risk to clients. The trade is guaranteed by the Options Clearing Corporation (OCC), which holds an AA rating and is designated as a Systemically Important Financial Market Utility (SIFMU). The OCC successfully cleared trades through both the 1987 crash and the 2008 Global Financial Crisis without failure. 

That said, there are two key risks clients need to be aware of: Margin calls and refinancing. 

Margin Calls 

Similar to a traditional margin loan or SBLOC, SyntheticFi Box Spread loans require ongoing margin to cover potential market fluctuations. Margin call risk arises if the market drops significantly. 

If a client borrows the maximum 50% of their portfolio under Reg T margin for stocks and ETFs, a margin call is triggered if their portfolio declines by 28.5%+.

(Calculated with an initial margin percentage of 50% and a margin maintenance percentage of 30%; max loss without margin call is [1 - 50% / (1 - 30%)] = 28.57%. These percentages are common for most stocks, mutual funds, and ETFs, but check with your custodian for exact margin requirements.) 

In the hypothetical example, Tony is borrowing $1.25MM, or 41.67% against his $3MM portfolio. His portfolio can fall by ~40% without triggering a margin call; that is, his 3MM can dip to ~$1.8MM without triggering a margin call. 

For additional protection, SyntheticFi can help with risk mitigation strategies, notably: 

• Using a Home Equity Line of Credit (HELOC) as a backup. A HELOC can be secured against the portion of home equity paid with a SyntheticFI Box Spread Loan. HELOCs typically carry an interest rate of Prime +1% (currently 8.5%). In the event of a margin call, your client may temporarily tap into their HELOC to meet the margin requirement, avoiding a forced sale of their portfolio. 

• Reducing the borrowing percentage. For example, borrowing only 30% of the portfolio would allow your client to withstand a market decline of over 60% without a margin call, sufficient to endure all major crashes since the Great Depression. SyntheticFi can also help clients with increasing loan collateral, which increases their margin of safety. 

• If your client is margin called, SyntheticFi can also contact and request your custodian to lower the margin maintenance requirement, which should give your client’s portfolio an additional 10-15% room to fall, without triggering a margin call. 

Refinancing 

Longer-dated SyntheticFi Box Spread Loans lock in an expiration far into the future. If a client wishes to refinance before expiration, the box spread must be offloaded. This introduces interest rate differential risk - the cost of closing the position will depend on the difference between the original locked rate and prevailing market rates at the time of refinancing. 

For clients who anticipate making early repayment, SyntheticFi supports a “laddered” approach, similar to a bond ladder, which may offer risk mitigation. For example, a ladder of SyntheticFi Box Spread Loans, with expirations ranging from one to five years, each 20% of the total loan value, enables a 20% annual paydown. 

Conclusion 

SyntheticFi Box Spread Loans offer a compelling alternative to traditional mortgages for financing real estate purchases, providing lower interest rates, tax-deductible interest as capital losses, and the ability to stay fully invested without liquidating assets. While they require liquid investments as collateral and carry manageable risks such as margin calls and refinancing challenges, these can be mitigated with strategies like HELOC backups or laddered expirations. For clients like Tony, combining a SyntheticFi Box Spread Loan with a jumbo mortgage can unlock significant savings—potentially hundreds of thousands over five years—while preserving portfolio growth and minimizing tax burdens. 

Footnotes

1. All rates mentioned in this article, including but not limited to, mortgage rates, prime rates, and box spread implied interest rates, are current estimates as of 2/24/2025.

2. Assuming 80% growth over 5 years, starting from a $1.6MM portfolio. A well-diversified portfolio grew 80% from 2020-2025. 

3. Assuming 80% growth over 5 years, starting from a $2MM portfolio.