News coverage of the UK’s ‘stubborn’ inflation rate, and the resulting impact on interest rates, has intensified in recent weeks. The Bank of England’s official Bank Rate now stands at a 15-year high of 5.25% and the market is pricing in further increases in the coming months. Therefore, attention has rightly shifted towards how this will impact mortgage borrowers.
Recently, I met with the Financial Times to discuss how these rate increases are impacting high-net-worth borrowers, noting that a high proportion of these individuals already hold an interest-only facility*.
Whilst the total share of interest-only mortgages in the UK has fallen since 2012, they remain a useful solution for those with a large proportion of their earnings weighted towards an annual or irregular lump sum such as a bonus, profit share or carried interest. Likewise, they can be suitable for those seeking to repay capital via a future liquidity event. Many of our clients at Investec (and high-net-worth individuals in general), tend to have multiple income streams and, in most cases, will hold significant assets outside of their mortgaged property.
This gives these individuals several options when faced with rising mortgage costs, regardless of how their current mortgage is structured. It will come as no surprise to hear that some of our clients have been voluntarily reducing mortgage balances to hit lower Loan-to-Value (LTV) bands to secure more competitive interest rates. We also continue to look across our clients’ balance sheets to ensure that we are considering alternatives. This could involve lending against multiple properties, in order to reduce the aggregate LTV and achieve a more attractive ‘blended’ rate.
It’s possible to mitigate the risk of rate rises, without sacrificing short-term repayment flexibility.
With the current interest rate outlook remaining uncertain, borrowers are finding it increasingly difficult to choose between a fixed or variable rate – a decision made more challenging due to shorter term fixed rates (such as two- and three-year rates) being higher than five-year fixed deals. However, it’s possible to mitigate the risk of rate rises, without sacrificing short-term repayment flexibility. We can do this by structuring a mortgage into multiple parts, which allows our clients to benefit from both fixed and variable products at the same time, with flexibility over which to repay first in the coming years.
These are just two examples of how we have been helping individuals to navigate the current landscape. There are many other ways in which we can support both new and existing clients, and every conversation starts with a blank sheet of paper. We remain focused on building long-term relationships and maintaining a regular dialogue with our clients, which is more important than ever in a volatile market. It is this level of understanding that will enable us to continue providing timely and highly personalised solutions. Please do get in touch if you need our support.
* Source: Investec
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