Enquiry line: +44 207 998 0570
enquiries@fwm.gi
Available 9:00am - 5:30pm (CET)
Mortgages for the Super-Rich Image

Mortgages for the Super-Rich

May 23, 2022

UK Mortgages and Expat Mortgages for wealthy individuals, resident non-doms and the super-rich

 

The credit crunch saw the end of the 100% mortgage offered by high street lenders in the UK. However, for the super-rich, it’s still possible to borrow up to 100% of the value of their home.

 

This can be achieved by securing the lending against property and against other existing assets such as shares or an investment portfolio. This type of lending is arranged through private banks, typically on an interest only basis, and most loans are never paid off until the home is sold. Increasingly, when the home is inherited, the next generation will take out a comparable loan.

 

Buying in London and borrowing all of the money to do so certainly brings benefits. Residents in the UK who have non-dom status (RNDs) and declare their domicile elsewhere, are a group who can benefit from this arrangement. RNDs are not taxed in the UK on money earned outside the country, provided they don’t bring their offshore earnings into the UK. By gearing up against the house they’re buying and their onshore assets, they can keep the amount of cash they need to bring onshore to a minimum.

 

For the super-rich individual, international private banks can lend against the combined value of multiple houses in different jurisdictions.

 

In a competitive property market, a further benefit is that funds can be released by private banks quicker than on the high street, helping clients snap up a bargain.

 

Mortgages for the super-rich typically cost banks more to administer than those for normal customers, partly because their incomes are rarely all from typical sources such as a salary, so take time and effort to fathom. Private banks are able to take the time to understand how a client’s income works. Borrowing to buy a house and investing funds can be seen as a door-opener by private banks. Private banks may even consider lending at a loss to themselves if the lending relationship opens the door to growing a wider relationship with the strong prospect of future funds being invested with the bank.

 

Private banks will look to target high net worth (or HNW) clients with an annual net income of over £ 300,000 and net assets of more than £ 3M.

 

Traditionally private banks offer variable rate mortgages linked to the Base Rate. However, with the anticipation of future interest rate rises, fixed rates are now becoming more popular, with private banks creating bespoke fixed rates for their clients.

 

The popularity of fixed rates has made borrowing through high street lenders for larger mortgage loan sizes more attractive, as high street lenders now have the lowest fixed rates and lowest arrangement fees. Some UK high street lenders can offer mortgages at a competitive fixed rate for a maximum loan size up to £ 10M with a minimum of 25% deposit, although borrowers need to be able to demonstrate clear historical income to show repayments are affordable.

 

This doesn’t disqualify all the super-rich from taking advantage of the competitive fixed rates available on the high street. For applicants such as a hedge fund manager with a regular salary and a history of annual bonuses, the high street is still an option.

 

High street lenders are criteria led, with little room for negotiation of their terms and less flexibility in their underwriting. For example, only a few high street lenders will be able to consider income earned offshore or income earned in a foreign currency.

 

In contrast private banks can be more flexible, taking into account unconventional income and complex income streams, offshore income, income earned in multiple currencies, retained profits, private equity investments, lump sums due to be received in the near future, a stock portfolio, and other assets such as fine art.

 

Being able to borrow the maximum loan-to-value is always going to be in demand. Why use your own funds, or liquidate your investments to put down a large deposit when a bank will lend you the money at competitive terms?

 

Most private banks are comfortable offering a maximum loan-to-value (LTV) of up to 60% - 65% loan-to-value for a dry loan i.e., where a legal charge against the property is the bank’s sole security.  However, some private banks will offer a loan-to-value as high as 85% or even 90% LTV against property for a HNW applicant with a strong income. The pricing for this type of high loan-to-value dry lending will be higher. The maximum loan-to-value offered will also taper down as the purchase price increases. By securing the lending against property and other existing assets, the super-rich can access the most competitive terms as well as the highest loan-to-value.

 

The precise tax benefits associated with borrowing money to buy expensive homes vary from country to country, hence the importance of receiving professional tax advice. In France and the UK, buying homes with borrowed money reduces the value of the home subject to inheritance tax. And the mortgaged portion of a home’s value is exempt from France’s wealth tax. For this reason, clients buying in France will usually be advised by their lawyers to buy homes entirely with borrowed money for 100% of the purchase price. UK residents, including resident non-doms, are exempt from capital gains tax paid on their main UK home when they sell it. Besides the tax benefits of basing in the UK, the prospect of home price increases is part of the appeal of buying a home. London property is usually seen as a safe haven.

 

The super-rich are not the only ones looking to maximise their home borrowing. Low interest rates and the high value of homes means that a growing number of older equity-rich homeowners in the UK are looking to take out loans. The funds raised can be used to supplement pension income, gift deposits to family members looking to get onto the property ladder, or buy second homes. With close to 700,000 homes in the UK now being worth over £ 1M, the number of “property millionaires” aged over 55 looking make their equity work for them is a growth market.

 

Equity release mortgages have no end date with the mortgage typically repaid when the mortgagor dies or moves permanently into a care home, and the property is sold. The rates are fixed for the lifetime of the loan, and the maximum loan amount offered is based on the applicants’ age and the value of their property. The older the applicant, the higher the loan-to-value. As the interest is rolled into the loan and not paid monthly, there is no requirement for any proof of income.

 

Many equity release mortgages now permit overpayments of up to 10% of the original loan amount borrowed to be made each year, without penalty. Or the interest charged can be serviced on a monthly basis, like an interest only mortgage. This means that applicants with a strong pension income can choose to minimise the amount of interest that is rolled into their loan.

 

The current low interest rate environment means that typical interest rates on equity release mortgages are now between 3 per cent to 4 per cent, compared with 5 per cent to 7 per cent five years ago.

 

Part of the appeal of equity release lending for the HNW over 55s is the tax advantage, since the mortgaged value of a home is exempt from the 40 per cent inheritance tax levied on a UK estate above £325,000.

 

Give us a call today on +44 207 998 0570 or e-mail enquiries@fwm.gi to book your free, no obligation consultation.

 

This article was written by Large Mortgage Loans, specialist mortgage advisers.