HOW TO GROW AND PROTECT WEALTH IN 2021 AND BEYOND
By Knight Frank Finance
More than a year on since Covid-19 sent shock waves across the world, experts from Knight Frank and Knight Frank Finance met to analyse key opportunities emerging across the real estate sector for investors. Watch this discussion unfold in the latest episode of The Wealth Report webinar series held on May 13th and read on below for the main takeaways.
Using Debt to your advantage
Head of The Private Office at Knight Frank Finance, Alex Ogario highlighted that clients can use the ultra-low cost of debt to their advantage.
“From an investment perspective, debt can be used by clients to provide diversification so they can pull equity out of one property and invest in another asset class,” he said.
“Clients use debt to […] create value, reduce concentration risk and hedge themselves. That is only emphasised by the rates that we’re seeing at the moment, which are historically low – clients can [currently] borrow […] in some situations at less than one and a half per cent per annum.”
In terms of the lending environment, he said appetite was strong, with “ultra-loose monetary policy and huge quantitative easing programmes” making credit more attractive than it ever has been.
Looking ahead, he acknowledged the risk of inflation if interest rates increased and noted the importance of taking a mortgage out at the right time in order to lock in the most attractive rates.
Lifetime mortgage facilities
From there, the conversation moved to an interesting shift involving lifetime mortgage facilities – an increasingly popular form of mortgage borrowing available to those who are over the age of 55.
Knight Frank Finance Head of Later Life Finance, David Forsdyke, said older, wealthier homeowners have started using lifetime mortgages in the UK to create more liquidity and increase their spending choices.
“We’re seeing clients using this to help them reduce their inheritance tax liability – the potential liability that they might leave behind for their beneficiaries.
“They’re also using it for a number of other applications, such as making gifts to the next generation or to restructure their other debts. In some places, they’re using it to replace income in order to protect [certain] assets and allow other assets to grow.”
Forsdyke said the cost of lifetime borrowing falling dramatically, coupled with mortgage providers making their products more flexible, were two key drivers behind this shift.
He added: “If you look at where property wealth is held […] the over 65s now hold a very high proportion in the UK and they are reaching an age now where they either want to release some of that equity or they need to release some of that equity and put it to use elsewhere indefinitely.”
Loan-to-value is back
Elsewhere, Ogario noted a move back towards normal operating policy in regard to loan-to-value, which is the amount a lender is willing to extend against a property value.
“Typically, our ultra-high-net-worth clients want to borrow the highest loan-to-value possible, which seems counter-intuitive given the level of wealth some of these clients have, but usually it’s for efficiency reasons such as tax efficiency benefits,” Ogario said.
“Clients here are looking to borrow as much money as possible cheaply in order to deploy those borrowed funds elsewhere and generate higher returns.”
“At the initial stage of the pandemic, there was definitely less appetite to be aggressive on loan-to-value, but I think now we’re in a position where, across the board, lenders are back to where they were prior to the pandemic.”
Addressing tax concerns
The discussion ended on the topic of tax. Flora Harley, Deputy Editor of The Wealth Report, said tax remained a top concern for 42 per cent of global respondents who took part in Knight Frank’s Wealth Report Attitudes Survey. This figure rose to 52 per cent for UK respondents.
With that in mind, panellists highlighted a series of trends in this space. Ogario said there has been a switch from ultra-high-net-worth individuals acquiring property through corporate vehicles (which are subject to an annual tax) to opting to transact via a personal name.
Elsewhere, he said some non-domicile UK residents, who take debt against a property when buying in the UK, were looking to take the highest loan-to-value possible against that property rather than having to move money offshore into the UK.
Forsdyke then outlined in greater detail why lifetime mortgage facilities were being used by an increasing number of clients to reduce inheritance tax.
“It might sound counterintuitive to borrow money in order to save money, but it works as long as the money being raised is moved out of the homeowner’s estate, perhaps through making a gift to beneficiaries or through some other estate planning tools.
“This creates a debt against the estate, which will reduce the taxable value of the estate.”
