July 19, 2012

Mark Zuckerberg's mortgage

It is a fallacy that wealthy people don’t need mortgages. If billionaire Mark Zuckerberg sees the need for a $5.95m mortgage on his home in Palo Alto, California, according to reports from Bloomberg, you can bet that those worth much less than his $15.7bn could also benefit.

Bloomberg reports that Zuckerberg has a ’30-year adjustable rate loan starting at 1.05 per cent’. It is likely that he has chosen a variable-rate deal, linked to Libor (the London Interbank Offered Rate) because the Federal Reserve has suggested that rates will be kept near zero for the next couple of years at least. Presumably he can also cope with fluctuations in his monthly mortgage payments, which is why he didn’t opt for a restrictive 30-year fixed rate instead.

The most interesting part is that he has a mortgage at all. But really, it makes perfect sense. If you can borrow money at such cheap rates, you can invest ‘spare’ cash you have where it will generate better returns. In this way, the wealthy can use other people’s money to make more money, which will make them wealthier still.

The other advantage the wealthy have is that they can get more favourable terms than the rest of us. Far from offering higher rates and charging bigger fees than high-street lenders, private banks often offer much better terms because they wish to attract the wealthiest borrowers. Lending is almost secondary; it is all about the client and their appetite to do other business, either at the present time or in the future.

The private banks understand that if they get someone through the door via their lending services, their wealth management side should be able to help with their investments. And for many private banks, this side of the business is far more lucrative than lending.

Some of our wealthy clients need to raise finance because they are not in a position to purchase solely with cash, while others choose to borrow against their property to assist with financial planning and to mitigate currency/tax risk.

Private banks don’t have a high-street presence so it is virtually impossible to access this finance without using a specialist broker. Banks’ lending criteria vary considerably so a bank that is suitable for one client may not be ideal for another. The broker who really understands the private banks will know not only the bank most suitable for the client but also the right banker to contact within that bank so they can access the right point of entry.