Mortgage Finance Gazette
Stamp duty changes and the Brexit vote have contributed to subdued demand for high net worth mortgages but there are underlying positive factors for this market, writes Alpa Bhakta, CEO of Butterfield Mortgages
The current state of the high net worth (HNW) mortgage market presents something of a paradox. Funds for lending are plentiful and some excellent deals are on offer, but the question is, how many takers will there be?
The expansion of capacity has coincided with subdued demand, despite a return of prices in prime Central London to the levels of 2014 and 2015, which may have been expected to prompt bargain hunting for some of the capital’s most desirable real estate.
There are one or two reasons to be cheerful, which is addressed later, but lending was subdued in 2017 and looks set to remain so in the months ahead. Neither 2018 nor 2019 seems likely to set any new records.
Foreign buyers
So, what has been going on? Every assessment of the HNW mortgage market must start with the absolutely central role played by international buyers. They are pivotal in the prime property scene and key to its health, or otherwise.
Such buyers frequently own assets across different jurisdictions, sometimes held in trusts or other structures, and can have income that is low in relation to these assets. Lending to such clients is a specialised and complex business, but demand for such loans has remained high.
That said, events during the last four years have not been conducive to generating confidence among international HNW individuals. For ease of reference, our definition of a HNW client – domestic or international – is someone with at least either £3 million in net assets or £300,000 of annual income.
Changes
In 2014, the restructuring of stamp duty greatly increased the tax burden on buyers of prime property, with a 10% levy when the cost ranged between £925,000 and £1.5 million and 12% above that.
The changes have worked as presumably intended, dampening activity in the top levels of the market. Hard on the heels of the tax changes came the June 2016 referendum vote for Britain to leave the European Union. If the implications of the stamp duty changes were only too clear for HNW individuals, the Brexit vote ushered in a new mood of uncertainty that persists.
The final shape of any deal between the UK and EU is unknown, which is hardly the sort of backdrop likely to encourage someone to take out a large loan on prime property. Nor is it the sort of climate in which the owners of such property will put it up for sale.
Most prime property owners, especially in Central London, do not need to sell, thus they can remain in their homes and ride out any market downturn.
This has the effect of reducing the number of properties available for comparison for the purposes of valuation. As a result, valuers react cautiously, marking prices down by 10% or 15%. Other sellers become disheartened, keep their properties off the market, and the cycle is reinforced.
At least the stamp duty change and the Brexit vote are in plain sight and known about. Harder to pin down, but with an impact on market confidence, are more vague suggestions of additional punitive measures against HNW property buyers. A “mansion tax”, or restrictions on foreign ownership, have both been discussed. If implemented, their effects on the market would be disastrous.
Bright spots
So where are the bright spots in this subdued picture? An obvious one is the post-Brexit vote slump in the value of sterling, which means overseas buyers get more for their money when foreign currency is changed into pounds.
We have seen a noticeable increase in demand on the back of this, and expect it to continue.
Another is that the Brexit vote is now “old news”, and, whilst the small print of Britain’s departure from the EU is undecided, we are little more than a year away from Brexit becoming reality. Many buyers will doubtless be making plans for what comes after.
Finally, the underlying attractions of the UK market, especially in London, remain as they were: security of contract guaranteed by a universally-admired legal system, and a cultural and social life that has no real equal elsewhere in Europe.
This is a market that has always bounced back in the past and is highly likely to do so again. When it does so, as mentioned earlier, buyers will find ample funds for lending.
We believe there are great opportunities in terms of lending to this market. From the growth of the supply of mortgage funds, it would seem that we are far from being alone.
