Though lending has become tighter, there are some serious upsides to not paying cash
Yes, it’s gotten harder to access multi-million-dollar home loans, but affluent buyers—who’ve bull-rushed suburban and second-home markets in the wake of the pandemic—should seriously explore financing even if you can offer all cash.
That goes for refinancing a luxury home, as well. The upside to leveraging and investing that cash has only increased now that average mortgage rates have hit new lows while stocks climb to all-time highs. The S&P 500 and Nasdaq Composite Index, for example, set new records on Wednesday—for the 22nd and 43rd time this year, respectively. (Though the major indexes took a step back on Thursday.)
“If the cost of borrowing is lower than the return they’d get from investing in their portfolio or investing in their businesses, then they may be better off financing,” said Jon Kessler, head of private banking at PNC.
And with myriad geopolitical and economic uncertainties prevailing, a little extra flexibility, in the form of cash, never hurts.
“They can be nimble and keep their liquidity and keep their cash reserves intact,” Mr. Kessler said.
In pre-pandemic times, this advice might come off as common sense if not downright obvious. But right now, some affluent home buyers, facing a competitive housing market and pressure to relocate before the fall’s dreaded “second wave” of the coronavirus, may forego the mortgage process, especially since it’s gotten stricter.
Jumbo (and super jumbo) mortgages are those that exceed the maximum amount that can be sold to government-backed Fannie Mae and Freddie Mac, which in most areas is a loan north of $484,350 (though more expensive counties have a higher cut off). Without those mortgage giants, banks either keep the loan on their books or lump it with other non-conforming mortgages and sell them as securities to investors.
But as Covid-19 gripped the U.S., that critical securities market reportedly dried up and banks became reluctant to add more risk to their portfolios. The pullback caused one measure of jumbo loan accessibility to plummet 50%-60%, according to the Mortgage Credit Availability Index compiled by the Mortgage Bankers Association (MBA).
“There was a huge drop-off,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. Banks, which had expanded access to jumbo home loans for years during the recovery from the last recession, began tightening lending practices, demanding bigger down payments, higher credit scores and larger bank balances.
But prospective borrowers may find those rules have already begun to loosen. In July, for instance, MBA’s jumbo availability index rebounded 5%, a sign that things were relaxing.
“We’re seeing growth in larger loan balances,” Mr. Kan said. In fact, home purchase applications for loans above $766,000 are leading the recovery in mortgage demand, according to data from MBA.
Indeed, Mr. Kessler, at PNC, said they offered and encouraged their high-net-worth private banking clients—both new and existing—to consider jumbo mortgage products throughout the crisis.
“We did tighten that box up a little bit,” Mr. Kessler said, referring to changing loan-to-value ratios and adjusting credit score thresholds. “But we were never out of the jumbo mortgage business.”
And PNC’s private banking arm has seen significantly heightened demand for such loans because of the low-interest rate environment.
The Power of Shopping Around
Aaron Kirman, a leading luxury agent in Los Angeles and president of the Estates Division at Compass, said a buying frenzy has hit the luxury market in greater Los Angeles as affluent buyers look for more space to quarantine, work and potentially school their kids remotely.
“A lot of people want to make a change,” he said. While the buyers Mr. Kirman negotiates with tend to pay all cash, he’s found those who do finance often get the most impressive rates in the fastest timeframe by working their private banking relationships. Such relationships also allow very wealthy individuals, whose finances are more complicated than a W-2 and FICO score, to structure a more nuanced mortgage agreement—for instance, one in which part of their stock portfolio is pledged as collateral.
That said, borrowers should still shop around, especially in this wonky environment, when borrowers are getting wide-ranging offers. The average rate on a 30-year fixed-rate jumbo loan was 3.11% as of Thursday and 2.55% for the 15-year term—though Mr. Kirman said he’s seen buyers secure rates below 1%.
Ilyce Glink, CEO of Chicago-based financial health platform Best Money Moves, whose written numerous books on personal finance and home buying, said she would advise affluent borrowers to start shopping for a mortgage with their own bank.
“But there may be alternative opportunities,” she said. Then you might go to a more holistic investment or lifestyle manager, which many high-net-worth individuals may already have. One example of this is Silicon Valley’s Iconiq Capital, which reportedly does everything from investing clients’ money, to arranging a private yacht and paying personal bills.
In addition to that, you might ask around your close contacts, Ms. Glink said. “You may have a wealthy friend who suggests you work with a specialized mortgage broker.”
Another, tertiary option that could yield a good deal could be seeking advice from your tax team or accountant, who could have lenders to suggest. “They would be able to tell you if they may have other ways to structure that deal,” Ms. Glink said.
“If you’re very wealthy,” she said, “you always assume you have a better place to park your money than in a house.”