Wealthy buyers turn cautious on luxury home loans
Jeffrey Feinman, New York accountant to the super-rich, in February arranged an unusual mortgage for a client buying a home abroad. Exceptionally for today’s mortgage market, the loan covered 100 per cent of the value of the home. It also came fixed at 3.25 per cent, comfortably better than the 3.9 per cent average for a 30-year fixed-rate mortgage in the US at the time. But the really striking thing was its size: $110mn.
While the world’s richest people could buy even the priciest homes for cash, the majority will — just like the rest of us — use a mortgage. That is where the similarities end, however. Home financing for the wealthy draws on an international web of advisers, including private bankers, accountants and lawyers. In this world, a high-value home is just another piece of collateral, enabling borrowing that frees up other cash to be sent round the world in pursuit of the highest investment return and lowest tax rate.
It is an approach they are still taking — but now much more cautiously — in a world of rising interest rates where the prospect of an economic downturn looms. Feinman says that, in February the typical mortgage he arranged for clients had a loan-to-value (LTV) ratio of about 90 per cent. Today, it is between 50 and 60 per cent. “This is partly about lending rates but also about the stock market outlook. Plus, banks’ lending appetites have reduced and there is drastically more scrutiny on borrowers,” he says.
When UK mainstream mortgage rates jumped last month, a consequence of the financial markets’ reaction to £45bn in unfunded tax cuts, super-rich borrowers saw their rates rise, too. “I have never been as busy as that week fielding enquiries from clients,” says Paul Welch, a broker who runs largemortgageloans.com. He estimates that his clients have about £1bn worth of mortgages coming up for renewal over the next three months. “Large mortgage offers were withdrawn and rates shot up. It was horrendous.” Cohn says events in the UK even had a knock-on effect in the US. “We are seeing rates rising and lenders getting tougher on underwriting,” she observes.
Charlie Hoffman, London-based head of the team that manages HSBC bank’s richest private clients, notes that “as interest rates rise, the gap for arbitrage might [narrow] and clients may think twice”. But the arbitrage between borrowing costs and investment returns is not the only benefit conferred by supersized mortgages — they can also bring tax savings. For example, for the UK’s 62,900 resident non-domiciled individuals only money brought into the country is subject to UK tax. A large mortgage for a UK home purchase can be secured against money or assets held offshore, thus saving tax on money that would otherwise have to be brought into the country to pay for the home. And for those domiciled in the UK, borrowing also reduces the inheritance tax bill for their estate should they die, as the tax is not levied on the mortgaged portion of a home.
In the US, interest payments on home loans can often be offset against investment income on a taxpayer’s annual return. Feinman says that most of his clients recover roughly half of the interest paid on such loans in this way.
So, even if there is less appetite for them currently, supersized mortgages look here to stay. Roarie Scarisbrick, a London buying agent, says the majority of high-value homes are bought with a mortgage of some kind. “Everybody says they are cash buyers, but it’s extraordinarily rare to see them actually go through and buy with cash,” he says.
The identities of those involved in the priciest home sales — let alone how they are financed — are kept under wraps, but sometimes details seep out. In 2019, a $94mn mansion in Bel Air, Los Angeles, was bought via a company using $58mn of debt. In 2017, The LA Times reported, celebrity couple Jay-Z and Beyoncé bought an LA home for $88mn, using $53mn of debt.
This story originally appeared on: Financial Times - Author:Hugo Cox
