Are overstretched HNWs downsizing?

“In a hot property market there will always be buyers who stretch themselves to borrow the maximum they can, particularly when it feels like property values are going to keep going up. But these buyers will be coming to the end of their low-rate deals and now face the brutality of higher borrowing rates.

“As monthly payments go up, many have no other option but to sell and downsize. This may not be as easy as it seems. With less movement in the market, they may have to take a hit on their equity and take a low offer. They also need to consider the feasibility of finding another suitable property in a market which is suffering from lack of supply.

“Every situation will be different, and homeowners have a hard decision to make. Sell up and take what they can for the property, or ride the wave and take their chances.”

We may see some HNW individuals downsizing in the face of rising costs. These borrowers tend use interest-only, for a lower monthly commitment, financial flexibility; repaying the mortgage with other income/assets. Unlike a repayment mortgage, interest-only costs are proportional; the rate doubles, the monthly payment doubles. Most HNW individuals are sensible and will have taken an interest-only mortgage that they could have afforded on a repayment basis, even at higher rates, so I don't see rising costs affecting this group specifically. However, some will have bought the nicest possible house at a payment they could only afford on interest-only, which is a recipe for disaster in an economic downturn. We won't see a raft of mansions on sale, but some may be forced to sell their champagne house if they bought it with lemonade pockets.

We have not seen an influx of clients looking to downsize. However, we have had a number of clients seriously consider selling their second/holiday home or changing it to a rental to ease costs.

When the rates were low, we had a lot of HNW clients that didnt need a mortgage but had one as they wanted to invest in other assets that gave them a higher return. However, many have now reduced their mortgage balance or even paid it off using their surplus funds. We had one recently where a client had a mortgage at circa £3m and they decided to pay it off as the interest rate soared.

Thankfully, due to the increase in salaries over the past few years, the majority of the customers I have met since October will be fine, It may not seem it when we tell them their mortgage is 30% higher, but with slight adjustments to their lifestyle, financially they will be fine.
The people who will struggle are the people that won't adapt to a new lifestyle or those who will lose jobs or fall ill, but that is the same whether interest rates are 1% or 5%.
Myself and my family have adapted, we are having less meals out, less football matches, and we have moved to a newer house from a 1930s Bungalow to reduce heating costs. In the short term this will help but these good habits and changes will have long term financial gains.

We're not seeing any signs of HNW home owners seekign to downsize. If anything it's quite the opposite. As some of the heat has come out of the market, buyers seeking family homes in London are seeing it as an opportunity to seize their 'forever' home. The recent news, for example, that prices are surging in Camden, Barnet and Islington is very much in tune with what we're seeing along with our estate agent partners in North London.

We may see HNW individuals that are truly overstretched downsize but for the vast majority I would say will be ok. These types of borrowers are generally financially savvy, and they would have opted for interest-only deals over repayment ones to ensure low payments and invest their money into assets that would earn them an income. So with increased interest they won't be hard hit as any that may have opted for repayment mortgages confidently ensure they can remain in their properties so we won't see any bargains on Millionaires Row up for sale. It's the average borrower that may be forced into a downsizing decision.

"We tend to see that our High Net Worth clients have more disposable income and are therefore able to swallow the increase in mortgage payments more than those earning less. Often their discretionary spend is higher and so there is also more flexibility to reduce spending in other areas to ensure the mortgage can continued to be paid."