Bank on borrowing

Almost two years of interest rate hikes have presented the UK property market with its first serious test since the Global Financial Crisis in 2008. So far, it’s performing well.

House prices will close the 2023 calendar year up 0.9 per cent before falling 4.7 per cent in 2024, the Office for Budget Responsibility said in November. That would cap a 7.6 per cent peak-to-trough fall from the final quarter of 2022 to the final quarter of 2024, and represents a remarkable display of resilience. While nobody wants to see the value of their largest asset shrink, that would leave values more than 15 per cent above their level at the pandemic’s onset.

The sturdiness of house prices is the clearest signal that this is a very different property downturn. The proportion of income that UK households spend on mortgage payments will remain below the previous peaks in both the Financial Crisis and the early 1990s, the Bank of England said in July. Lenders are in a far better position to support customers facing payment difficulties. Lending regulations introduced since 2008 have been successful in limiting the build-up of risk in the property market.

That’s not to say lenders are finding it easy, though. Mortgage approvals for the purchase of homes are running about a fifth below the 2022 average. Bankers are under pressure to hit targets.

Demand to lend to asset-rich clients is rising. Private banks in particular are offering innovative borrowing solutions in an attempt to gain market share. At Knight Frank Finance, we’re seeing these solutions take shape – here are some of the strategies we’re deploying for our own clients.

Bank on your relationships                                                

By building the right relationships, clients can obtain bespoke lending that suits their unique circumstances, whether they have interests in multiple jurisdictions, assets in various currencies or require a degree of confidentiality that would be uncommon when working with a high street lender. It is in these scenarios that private banks really come into their own.   

While mainstream lenders have rigid borrowing criteria, private banks are more flexible. Indeed, the volatile conditions of recent years have changed the banking landscape, making this distinction even more apparent.                                                       

Private banks have historically insisted that clients concentrate all their banking and wealth management with them, for example, but the drive to win more business means that they are increasingly willing to assist clients on a loan-only basis. We regularly advise clients to review their existing arrangements to ensure they are optimised for the way banks operate today.

Debt as an investment tool

The decision to take on debt isn’t as simple as it was two years ago, but it’s still a vital tool that can be used to mitigate tax exposure or free up funds that can be invested at better returns elsewhere.

Clients with offset mortgages or draw-down facilities secured against a property 18 months ago – back when interest rates were at one or two per cent – are increasingly opting to draw that loan down and invest it elsewhere to generate healthy returns. Other clients are choosing to take on debt to reduce the value of their estate that would otherwise be subject to Inheritance Tax.

Borrowing against property isn’t the only option, either. If you read the recent interview with my colleague Alex Ogario, you’ll know that specialist lenders are eager to assist clients borrowing against luxury goods including classic cars, artworks, jewellery, wine collections and even intellectual property. This is an area that Alex’s team in the Knight Frank Finance Private Office are advising on more and more.