People are often confused as to why wealthy clients choose to take out high net worth mortgages to buy property when they could afford to purchase it outright in cash.
There are many reasons wealthy buyers would choose a mortgage. The main reason is that they prefer to protect their liquidity, keeping it available for other investments. However, there are a number of other factors at play, including record low interest rates, and the illiquidity of trophy assets in the current market, taxation, capital controls and more.
High net worth individuals prefer to be as liquid as possible, so tying up a large sum of cash in one asset is a risk. By not having all their cash held in one property, high net worth individuals are free to invest in a variety of other diversified assets, such as stocks and shares. These often have higher yields and are more immediately accessible. Investing in multiple assets gives them a myriad opportunity for return, and provides protection should one investment prove poor.
Low interest rates
Although we do expect to see interest rate rises over the next two years, interest rates are still very low in comparison to what they have been in the past. At this point in 2008, the Base Rate was 5%. High net worth clients tend to opt for interest-only loans, as the appreciating value of the property is likely to outweigh the interest charges, with the sale of the property providing security on the loan.
Illiquidity of trophy assets
Now more than ever, trophy assets – particularly those in Prime Central London – are not appreciating at the value they once were. Purchasing such an asset with cash might not necessarily pay off, especially as these properties are currently taking a long time to sell. Therefore, investors should instead hold on to them for the long term, seeing them as a safe store of value. Taking out a mortgage makes more sense in this instance, as borrowing is so relatively cheap.
So, high net worth mortgages may seem like an odd concept, but it makes perfect financial sense. We are the world’s leading international high net worth mortgage broker. We have a wealth of experience in making sure our clients’ assets are protected and the property purchase is structured in a way that lets them maintain their liquidity for other investments.