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For high-net-worth individuals who don’t need to borrow to buy a home, low interest rates present a quandary: To borrow or not?

The Covid-19 pandemic has yielded a number of unusual consequences, one of which is a real estate boom. Homes in suburban and vacation areas, where people can comfortably social distance and work from home, have been in high demand, and prices have risen accordingly.


“Working from home has become everybody’s new norm. Clients are really rethinking where they want to live,” says Erin Gorman, National Head of Mortgage Solutions at BNY Mellon Wealth Management.


Many high-net-worth individuals think that being in the office five days a week is no longer critical, even when the pandemic ends. That’s freed up people to move away from urban locations.


“On both coasts, they’re buying in high-end resorts, waterfront properties in places such as the Hamptons, Nantucket, Palm Beach, Newport Beach,” says Gorman. “We’re also seeing them buy in high-end ski resorts and ranch-type resorts in places like Lake Tahoe, Nevada; Park City, Utah; and Whitefish, Montana. And we’re seeing this as a continuing trend in 2021.”


Despite rising prices, demand continues for second homes, vacation homes and suburban properties because interest rates are so low. For high-net-worth individuals who don’t need to borrow to buy a home, the low rates present a quandary: To borrow or not?


When to use leverage


Low interest rates present an opportunity for affluent individuals to use leverage to their advantage. Buyers can keep their cash invested in the stock market or other investments, and borrow at historically low rates to purchase additional homes.


“Our clients oftentimes don’t need to borrow—they have sufficient liquidity. But if you can borrow at a lower rate than you can earn through investing your money in the market, there’s a potential arbitrage right there,” says Andrew Seiken, Senior Wealth Strategist at BNY Mellon Wealth Management. “From last March to this March, the markets have gone up over 50%. But if you sell investments and put cash into real estate, there may be a tax associated with that sale and typically real estate doesn't have the growth potential that the market does over time,” he says. “Savvy clients and savvy investors understand and think, ‘Would I use my own money?’” 



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Rates close to historical lows may present an ideal opportunity for high-net-worth buyers to acquire second homes, according to Seiken. And they have plentiful options, including:


  • Locking in low rates with longer-term facilities such as a 30-year fixed mortgage, an adjustable-rate mortgage or even interest-only loans.
  • Using investment credit lines to present all-cash offers that more sellers prefer in this competitive market, then utilizing a mortgage to pay off the credit line.
  • Using an investment credit line, secured against their investment portfolios, to make tax payments and capital calls.


Borrowing options like these can be an effective tool when part of a broader balance sheet strategy, Gorman says.


“When you’re using leverage, you can help clients manage the impact of taxes, strategize their spending and protect their wealth by giving them an alternative to liquidating,” Gorman says. “There are a lot of different estate planning tactics at play around what I would define as borrowing strategically. Especially in this low interest rate environment, clients who utilize leverage can enhance their investment returns.”


Tax implications of where you buy


As the rise in remote work and schooling prompts many people to relocate, additional tax planning may be necessary. Tax rules vary across the country; some states require income taxes from those who work in the state for just one or two days, for example, while others require a 60-day stay before they start charging.


“Where you’re buying real estate may impact your wealth preservation and wealth transfer strategy,” says Seiken.


Buying properties in other states may also have an impact on estate taxes. Some states such as New York and Connecticut have an estate tax of approximately 10%, while the majority of states, such as Florida, don’t levy an estate tax; people who permanently move from New York to Florida and no longer wish to be considered New York residents may also need to revise their estate planning documents. Owning property in California, or another community-property state, may also require some additional tax and estate planning. Certain types of trusts can be useful to those who own property in multiple states and don’t want their heirs to go through multiple probate administrations to settle the estate.


A customized, strategic borrowing plan can help buyers take these tax and legal implications into account while unlocking opportunities to grow wealth.


“When you spend your cash, there's an opportunity cost to that. You could be doing something else with that money,” Seiken says. “We are a wealth management firm, so we talk to clients about strategically putting that money to work.”

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