Why do the rich love their interest-only mortgages?

As a portfolio landlord and developer who uses interest-only mortgages at scale, here are my top reasons why they make so much sense.

Diversification of Investments: Instead of paying down the principal, the funds can be invested in stocks, bonds, and mutual funds to generate additional returns that have historically outpaced mortgage costs.
Real Estate: The extra cash often goes towards deposits to expand the property portfolio, benefiting from rental income and long-term appreciation across multiple units.
Entrepreneurial Pursuits: A lot of entrepreneurs redirect the funds towards new or existing business ventures, leveraging the saved-up capital for higher returns.
Lifestyle Enhancement: While not a personal priority for me, many wealthier borrowers prioritise luxury experiences (new Porche, second home etc) to elevate their standard of living.
Philanthropy: Finally, I know many who support charitable causes, creating positive change and potentially garnering tax benefits too.

I'm not 'the rich' but I jumped at the chance to go interest-only on my personal mortgage. It's a fixed rate, so not sensitive to rate rises. It allows me to invest in shares and manage household cash flow better while we have school-aged kids whose school bills cost a fortune. Once they've flown the nest, I'd have more spare cash to pay down the capital or move to capital only. Also, I would likely downsize and there would be enough growth hopefully in the house price to cover off the interest-only portion.

Wealthy borrowers want to leverage their income. Cash is king and repaying a mortgage on an interest-only basis allows them to keep spare cash for investing in other assets, whether that be other property, their own businesses or stocks and shares.

As a High Net Worth specialist, we predominantly assist clients looking to borrow over £1m. We find that the larger the mortgage, the more appealing it is to have interest only.

Generally, you will need a minimum income of £100,000 per annum with a retail bank and £250,000 with Private banks.

As the monthly payments are much lower on interest only, the wealthy clients tend to reinvest this in other assets such as stocks as they feel it can potentially give them a higher return.

It also allows flexibility of paying a reduced monthly cost and paying ad hoc payments as and when they can. For example, we see this a lot with bankers or partners of law firms when they receive large annual lump sums.

Most retail banks cap at 75% interest only for loans above £1m. However, we have access to private banks that can go up to 90% for HNW clients.

I love my interest-only mortgages because I'm a property investor. I'm interested in cashflow, not paying off the mortgage. So having the mortgage interest-only means that I get more money out of my investment vehicle. There's no need to pay off the mortgage as I can do that if I sell up. But right now, my property portfolio is my pension!

Its all about control and flexibility. With an I/O mortgage, you can choose when to repay and how much. A huge % of 'Rich' people dont have the same income each month due to how they earn. Also, why put that money away forever when they could re-invest if needed? Bigger risk = bigger reward. Their income will vary usually, or for example, they may have a big share portfolio and when a drop is expected, they may wish to sell some of their shares and put that money into their home if they dont want to reinvest it later. Other months, they may wish to not pay capital. Sometimes too, its just the choice of the client. I have clients who are paid an average wage, but very variably and wish to overpay only when they have a good month whereas on the bad ones, they can pay the minimum.

As a financial planner, not a mortgage broker, we often recommend wealthier people look into interest only mortgages. Their tax bills are usually higher and having more spare income to pay into Pensions and save 40-60% equivalent in income tax or VCT's and save 30% income tax is appealing. Especially when they have ample other assets to repay the mortgage in later life, for example through sale of a business or inheritance. These savings trump any interest saving on the mortgage. Similarly, the tax savings would then receive compounded growth over time and with equity returns historically being higher than costs of debt over time, the savings can be substantial. Inflationary periods deflate debts relative to the rising value of money. All this comes with the proviso that you have to stomach the extra risk and be sure of having a repayment vehicle in place for when the capital does need to be paid off.

Most lenders offering interest only loans do ask for relatively high minimum incomes, though not all. They are no more sensitive to interest rates than standard capital and repayment mortgages. Clients who take this kind of mortgage will tend to be more financially sophisticated, meaning they will be aware financially of what else to do with their money. They will look at mortgage rates of currently 4-5% and make a decision on whether they can allocate their money elsewhere to achieve a higher return. This could be funding investments, other property purchases, pensions etc. For other applicants, they will use the extra funds saved to fund their lifestyles, particularly child care costs and private school fees. They will take the view that over the years the rate of capital growth on their property will enable them to sell at a substantial profit and downsize when they intend to retire.

Although it’s very rarely a recommendation I make to clients for their homes, as it ultimately comes down to a client’s attitude to risk and their objectives, I’d personally have my mortgages on interest only (and I do not consider myself ‘rich’). Some do so to free up cash to invest elsewhere, but my main reason for this is inflation.

If you take a loaf of bread, for example, in 10 years it will most likely be priced higher. One of the main factors for this is the value of the pound decreasing over time, due to inflation. In other words, it takes more pounds to buy the same loaf of bread, as the pound is now worth less.

The same goes for debt. As the value of the pound generally erodes over time, so does mortgage debt. The debt might show the same figure, but the actual value of the debt will likely be less in real terms.

That said, it’s certainly not for everyone. Understanding the risks is vital and you'll need a plausible repayment strategy in place.

The most common rationale I have received from wealthy people wanting interest-only mortgages was that they would downsize in the future or use funds from the sale of their business to repay the debt. In my experience, virtually none of them will sell the family home and all the memories contained in it, and likewise, they will often seek to pass the family business on to their kids.
As many "wealthy" people never truly retire in the normal sense this does not tend to be an issue. Inflation in the longer term has eroded many of their debts which will ultimately be paid for from their estate or beneficiaries. It does however create a one rule for the rich and another for the rest of society situation as many people would probably be more than happy carrying debt throughout their life in order to live in a nice house. However, they are typically forced to repay debts before retirement or take out more expensive equity release products, often to achieve the same thing.

Ultimately being wealthy may mean that you're asset-rich and relatively cash poor. Talk to most accountants and they do as much as possible to make their clients earn as little as possible on paper, pumping money into pensions etc as it may well be tax efficient if for example they own a limited company. It may well be in that case then that it makes sense to take the lower monthly repayment of an interest only mortgage and utilise that pension pot as a repayment vehicle. However it's not to be taken lightly. If you have an interest only mortgage, because the balance is not coming down each month, you will end up paying more interest over the same period versus the equivalent repayment mortgage.