Wealthy borrowers are also more likely to use their savings to offset higher mortgage repayments, brokers have argued, but are unlikely to make changes to their pension saving, counter to new research from Saltus.
The Saltus study found that around a third of high net worth individuals (HNWIs) had dropped their pension contributions, or plan to in the coming six months, in order to ease the pressure on their finances.
A big contributor to the strain on their money is the prospect of higher mortgage repayments. Almost half have seen or expect to see a significant increase in their mortgage rates, and therefore the size of their repayments, according to the study.
High net worth savers are more likely to have cut pension contributions over the past six months than the population as a whole, at 14 per cent compared with nine per cent of the general populace. They have reduced contributions by an average of £1,246 a month.
Mike Stimpson, partner at Saltus, said that the fact that many HNWIs were cutting their contributions in order to cover their higher mortgage repayments in the short term was putting their prospects of saving a sufficient pension at risk.
A switch to needs-based borrowing
David Forsdyke, head of later life finance at Knight Frank Finance, said he had not seen any evidence of wealthier homeowners cutting back on contributions, suggesting that the removal of the lifetime cap may actually encourage them to put more money into their pension pots.
However, Forsdyke suggested there had been a slowdown in wealthy homeowners making significant gifts to their beneficiaries.
He explained: “When lifetime mortgage borrowing was at rates below four per cent, it made sense to borrow at that rate and redistribute to the younger generations. There’s a saving on inheritance tax there, but it also gets the wealth into the hands of a generation that will want to use it to invest in their own assets.
“But now rates are at much higher levels, that tap has been turned off. They aren’t interested in doing that at six or seven per cent ‒ we aren’t seeing the aspirational borrowing with lifetime mortgages, it’s more needs based.”
Tapping into savings
James McGregor, director of Mesa Financial, said that there had been “two main shifts” depending on the clients’ leverage.
“Our clients that are more highly leveraged that own a second buy-to-let accidentally are now looking to dispose of properties. As soon as interest rates increase and yields are relatively low on these particular assets, we are then seeing situations where our clients are paying more in tax than they are getting from their property. This is usually in situations where they are highly leveraged”, he added.
He said that on the “opposite end of the spectrum” clients were paying their mortgages down from cash reserves, which in theory would be reducing the amount going into pensions.
“I would expect this to be a solid use of funds for the fortunate people that can do this. If people are not seeing low risk, sensible returns elsewhere then paying down expensive debt can be a good investment. In this market it is key for HNWI to have access to the correct funding structures which allow them to leverage properly whilst mitigating risk.
“We are currently refinancing a number of portfolios where the current market has created good opportunity for our clients in a lot of instances. This is where the great advisers will add so much value in the current market, with such a volatile market it is key we are in a position to deliver the absolute best lending solutions for our clients circumstances,” McGregor noted.
