Three reasons Ultra-High-Net-Worth homeowners are taking on mortgage debt

Taking on debt for the super wealthy is far from a necessity. Many homeowners looking at super prime properties valued at £10m+ have the funds to purchase them outright. But, unknown to some, mortgages can offer Ultra-High-Net-Worth (UHNW) buyers efficiencies that rival cash purchases. Here are three reasons why UHNWs should consider a mortgage.

1. Flexibility

Having flexibility in their investments is hugely important for UHNW individuals. This is where mortgage debt can be very appealing, enabling them to invest in an asset now, whilst still having the ability to deploy their capital elsewhere. Where clients are seeing an arbitrage there are clear gains. For example, it could mean they’re paying 6% to service the debt in the UK, whilst making 15% on their money elsewhere in the world. There are further benefits too when taking out a loan with a variable interest rate since these products are not usually subject to early repayment charges. So, they would be able to pay off the loan earlier without incurring a charge if it was not advantageous to deploy their capital elsewhere. In short, it gives them options.

2. Tax benefits

Depending on an individual’s tax position, debt can also bring various advantages. Although individuals should of course seek professional tax advice before taking out a loan to understand whether this applies to them. One benefit is linked to inheritance tax (IHT). Individual owners of properties in the UK are normally subject to a 40% IHT for estates worth over £325,000 upon their death (depending on their circumstance, with different rules in place for properties owned in a different way). So, for purchasers of high value properties, taking a mortgage could reduce their liabilities by millions.

Other tax benefits under current government rules, include potential savings for non-domestic residential clients. A mortgage here could enable them to purchase a property in the UK without having to move their money onshore (which would be subject to tax). Our team has just acted for a client where this was the sole driver for taking out a mortgage, so this is clearly compelling for certain UHNW individuals.

3. Managing your currency exposure

Mortgages can also be a useful tool in managing an individual’s currency exposure. Depending on their base currency, some clients want to avoid holding all their funds in sterling. Of course, by taking a loan they are only required to provide enough equity for the deposit. They can then service the loan in another currency. Then, when they are ready to pay off the mortgage, they’re able to sell that asset in sterling. So, this obviously hugely reduces the amount of equity that would have to be transferred to purchase a property compared with a cash purchase.

Do you have a client we can help? Email mortgages@knightfrankfinance.com to speak with our property finance specialists.