From staying liquid to tax planing advantages - why do HNW individuals get a mortgage?

On the surface, it may seem counterintuitive that someone who could afford to buy a property outright would choose to use a mortgage.

But in reality, it often makes far more financial sense to borrow, with a multitude of benefits for high net worth individuals, business owners and international borrowers who take out a secured loan rather than tap into their own wealth. Read more about our high net worth mortgage offering. 

Mortgages are cheap and accessible 

• Using a mortgage in the current climate is especially appealing because financing costs are very low.
• Interest rates are at rock-bottom so it makes sense to take advantage of the ultra-cheap borrowing on offer.
• Wealthy clients are seen as a safe lending risk, therefore there’s no shortage of banks willing to lend.
• As a result, high net worth borrowers can expect to secure a loan on exceptionally favourable terms, with rates as low as 1.09 per cent.
• Lenders are in fact willing to offer rates below 2% for a wide range of circumstances.

Building a property portfolio easier with mortgages

• At a time when uncertainty looms over the global economy, investors may be looking for places to keep cash and protect it from market fluctuations.
• Prime property is viewed as a safe place for cash and a stable asset.
• Using mortgages to buy homes essentially means that more property can be acquired than through cash alone.
• Further, low interest rates across Europe, mean that property can provide better long-term gains, compared to other safe investments such as savings and bonds.
• Over the long-term rising property prices can pay off the mortgage debt.

Staying liquid

It’s important to wealthy individuals to stay liquid, especially in times of crisis, rather than locking up funds in property.

• High net worth borrowers are often entrepreneurs or active investors and want to have cash to hand for new ventures that may arise.
• This is especially the case in the current environment where recessions and economic downturns can provide a raft of opportunities to pick-up new assets at favourable prices.
• And because mortgage rates are so low, it makes financial sense for investors to borrow money for a property, and then use cash for investments that can potentially provide returns that beat the interest on a loan.
• Taking a mortgage at a high loan to value (LTV), or on an interest-only basis, helps keep repayments as low as possible and keep financial portfolios liquid.

Property as a currency investment

• International buyers who borrow in a currency outside of their main residence can benefit from changing exchange rates.
• For example, buying a property in euros when the majority of income and assets are in sterling.
• If the currency strengthens then the debt effectively reduces meaning there is less for a borrower to pay back.
• A property in another currency can also spread risk across a portfolio.

Inflation-proof finances

• A further benefit of using a mortgage is to beat inflation, which has recently jumped in the UK, albeit from a relatively low base.
• A lump sum of debt always stays at the same level, whereas inflation reduces the value of money.
• The Bank of England target an inflation rate of 2%, so a 10-year mortgage at a long-term fixed rate of 1.8% will beat the rate.
• And over this time, price rises will actually erode the value of the mortgage debt.
• It means that a £1 million mortgage today will be relatively much less in the future.
• Borrowing and fixing into a low rate protects cash and assets against inflation.

High levels of wealth but cash inaccessible

• The finances of the wealthy are rarely straightforward, with money often spread across a range of interests, as well as being tied up in business ventures.
• High net worth players can be extremely asset rich while having relatively low levels of cash.
• Again, this is where mortgages make more sense than trying to liquidise assets.
• Taking profit out of a company through pay or dividends means tax is usually due – potentially at a top rate of 45% in the UK.
• It means a £1 million dividend taken from a company could incur a £363,000 tax bill, whereas a £1 million mortgage at 2% would only cost £20,000 per annum.
• Releasing cash out of a business could also mean sacrificing a stake or losing influence over its future.
• For other investments, capital may be subject to penalties if it is released early, or it could mean missing out on deferred bonuses or long-term incentives.

Tax planning

• A mortgage can be useful tool for wider tax and estate planning, helping wealthy clients to limit their exposure to punitive taxes.
• For example, a property brought outright will typically be liable for inheritance tax charged at a steep rate of 40% in the UK.
• However, if the property is mortgaged, the debt will essentially protect that portion of the value from inheritance tax.
• Funds that had could have been used to buy the home are then freed up to be potentially placed in offshore investments or other assets that are easier to shield from tax.
• Mortgages also play a role in tax planning in other parts of Europe, including French and Spanish mortgages, where a bigger mortgage will reduce wealth tax liability.
• This is not intended to provide tax advice; borrowers looking to use a mortgage for tax planning purposes should always seek professional advice from a qualified financial planner.