With a global client base and a decade of experience securing property finance for ultra-high net worth individuals (UHNWI), my broker and research team at Enness Private Office have their finger on the pulse when it comes to mortgage trends for wealthy individuals.
With the first quarter of 2018 drawing to a close, I’ve reviewed the five biggest trends we’ve seen in UHNWI mortgages—and the results make for interesting reading:
Especially if you own another property elsewhere, stamp duty in the UK can make buying a larger home feel prohibitively expensive. This means buying super-prime luxury property in the most expensive postcodes has become less popular.
Instead, we’ve seen a real trend towards clients wishing to take out refurbishment mortgages or development finance. Instead of prioritising iconic postcodes, buyers have begun to purchase older, cheaper stock, with the view of securing refurbishment finance, working with a reputable interior designer, and creating their dream home instead of sinking this money into stamp duty.
Historically, investors in London property have enjoyed extensive capital appreciation, meaning UHNWI have been keen to take out a mortgage to purchase luxury property and enjoy a rapid price acceleration. However, the prime property market has stagnated somewhat over the last two years, meaning this is no longer considered a good strategy.
Savvy investors are looking for other ways to make property work for them. We’ve therefore seen a marked increase in clients refinancing their assets to release capital to invest elsewhere, whether that be in a liquid stocks and shares portfolio or higher-yielding commercial property. This gives our clients a much greater degree of flexibility, which is very desirable for UHNWI’s.
On that note, UHNWI are also diversifying the type of property they’re investing in.
Over the last decade, interest has primarily been in residential and buy-to-let mortgages. But now—between tax changes and flatter rental growth—fewer UHNWI are interested in buy-to-let mortgages, as it becomes more challenging to turn a profit in this arena. Instead, UHNWI are diversifying out of residential London property.
One method of diversification is an increasing trend for investment in Europe. On the international luxury property market stage, the numbers are looking very positive, particularly in France and Spain. Paris is likely to do well throughout 2018. The French Riviera will remain as desirable as ever; indeed, investors will probably head back to France after changes to wealth tax mean tax conditions are more favourable for those in the high net worth bracket. Enness International arranged €297million in French real estate finance in 2017, which highlights the phenomenal appetite of investors.
Wealthy investors are also moving from buy-to-let to commercial property as an investment. There are useful tax reliefs available with this asset class, including the usual income tax and corporation tax relief on contributions, plus capital gains tax-free growth and no taxes on rental income to the pension fund.
With commercial rental yields on tertiary property at about 8-10% a year, and a typical mortgage rate around 4% you can gear the asset to gear your returns.
For high net worth clients with large and complex mortgage requirements, private banks have always been the go-to for securing a bespoke solution.
In comparison to the strict mortgage product criteria of high street banks, private lenders are much more flexible and able to work with unusual client profiles. However, private banks often require clients to place ‘assets under management’ (AUM) as a condition of the mortgage—often around 50% of the loan amount.
Some clients may be more than comfortable with this if they have a prior relationship with the lender, or if the deal is particularly lucrative. Yet many are left feeling extremely frustrated with this scenario if they are happy with their existing asset management, and do not wish to place wealth with the lender.
Fortunately for these clients, we’re seeing an increasing trend from the banks towards ‘dry lending’, or mortgages without assets under management. Some very reputable names in the industry have begun to cater for those seeking a large mortgage without assets under management.
This is mainly due to an extremely competitive market at present, as high street banks have increased their offering for high net worth clients. Caps have been raised, and so has the high-street appetite for larger loans. Where historically high street banks would typically only lend up to £1million, they are now able to lend anywhere in the region of £5million, meaning that private banks have been forced to make changes and become more competitive to retain previous levels of business.
Finally, we’re increasingly seeing clients take out property finance for financial planning purposes.
For example, we’ve recently seen more clients taking out a mortgage to fund life insurance policies, such as a Universal Life or Whole of Life policy. A Universal Life Insurance policy provides permanent cover until the policy holders’ death, but also acts as somewhat of an investment vehicle. This is particularly appealing for UHNWI individuals, as it can be used for inheritance tax (IHT) settlement and mortgage protection.
Positive moves in the UHNW property market
It’s been a tough few years for the prime property market, but lenders have plenty of liquidity on their balance sheets and a high appetite for lending to the right clients.
As these trends show, mortgage market activity is still high for UHNWI. Smart property investors have continued to find ways to make the most of a difficult market, and as the luxury market stirs back to life, investors will continue to adapt accordingly with their property finance inclinations.
Islay Robinson is Chief Executive Officer of Enness Private Office, the specialist, high-end lending division of Enness, an independently owned and completely impartial mortgage brokerage with offices in Mayfair, Hampstead, Monaco and Dubai.