In 2017, Beyoncé and Jay-Z pulled out a $52.8 million mortgage to finance their Bel-Air home.
If you had tens of millions of dollars lying around, you might think you should pay for a house in cash. This has been the case historically.
However, more often than before, wealthy people use a mortgage to finance their home. There are a lot of reasons you might do this. Besides freeing up existing cash, someone with this much money could benefit from making wiser investments.
What makes maintaining a mortgage an attractive option for the ultra-wealthy?
Here’s how wealthy people use mortgages on celebrity houses to leverage their wealth when rates are good.
Free to Make New Invest
Investing isn’t a free activity, and you may encounter situations in which you’ll lose.
Right now, wealthy people are taking advantage of low interest rates to maximize their profitability in the market.
One of the biggest perks of pulling out such a large loan is the room to invest. Interest rates on super jumbo loans tend to be low, opening a great opportunity for the wealthy to finance their mansions.
This allows these people to put their cash to work in other places.
When a wealthy person finances a home they could easily buy in cash, they can use their cash to buy bank-stocks or other investments. In some cases, the payouts on these investments are greater than the interest paid on the mortgage. The hope is the investor will make more money than the cost of the mortgage.
This strategy carries inherent risks, and not everyone will be successful. For example, interest rates on mortgages can rise at any given moment.
It can be difficult to find investments that yield more interest than the cost of the mortgage. As rates return to normal levels, this strategy may no longer make sense.
Maintaining Business Relationships
Some wealthy people have stakes in companies all across the world. From a business standpoint, they need available cash for business transactions.
An individual might need to pay for several different dinners over the course of a week to close a business deal. To some business savvy individuals, building these relationships is vital to growing wealth.
In the world of business, contacts are everything, and businesspeople should treasure each one of them. It costs money to maintain these relationships, so they need the extra cash to spend on clients and partners.
Maintaining a Lavish Lifestyle
Buying a multi-million dollar estate in the hills of Los Angeles will put a dent in anyone’s wallet. Believe it or not, wealthy people pay for things.
Just like you or I, buying a home could leave them with less money to spend on the more lavish aspects of their lives. This could be difficult if they’re used to spending loads of money to go out with friends.
Some wealthy celebrities spend very little time at home. Even if they continue to use credit cards, they still need the money to pay them off each month.
Of course, they could suck it up like an average American. But why not be smart about it?
Instead, they can take advantage of borrowing opportunities from those institutions who are willing to take the risk. Often, these lenders offer super jumbo loans as a means of maintaining customer loyalty.
Large traditional banks like Goldman Sachs and JP Morgan are most likely to approve these sorts of loans. The banks evaluate each of these applications on a case-by-case basis.
Usually, someone can only secure a loan of this size if the applicant is an existing customer to the bank. A bank won’t approve a super jumbo loan for a new customer.
Having Debt Is Good
Not everyone agrees with this statement. Some people hate the idea of carrying around extraneous debt because of the possibility of accruing interest.
However, having debt allows an individual or business entity to build creditworthiness. As you pay off your debts over time, you build trust with creditors.
Taking on no debt could signify a lack of funds to pay back a loan. For celebrities and other wealthy individuals, having a mortgage is an easy way to maintain debt over a long period of time.
A Strategy Called the Carry Trade
This strategy involves taking advantage of the difference between two interest rates. Most often, this involves borrowing in one currency and investing in another.
The carry trade can be a risky strategy for those who choose to utilize it. Trading currencies aren’t the only way to do this, though.
A popular way to utilize a carry trade is to take out a loan at a low interest rate and use the loan to invest in an asset likely to yield a larger return. A homeowner may choose to borrow against the equity in their paid-off home.
Anyone who chooses this strategy should take caution and have a working knowledge of how to leverage their wealth. A certain portion of an individual or company’s capital comes in the form of debt. They can use the debt to generate returns that exceed the cost of the loans.
This type of investing can cover the cost of the loans and even generate a stream of income. Carry trades are useful for those who wish to supplement their retirement income, and those whose mortgages are paid off.
Borrowing against the equity in a home is common enough. The first challenge here is to battle rising interest rates, but it may be easier with fixed-rate loans. The next challenge is finding investments that yield returns greater than the cost of the loan.
Differing Views of Debt
People have been using borrowed money to make investments for ages. However, not everyone will be in favor of using debt as a tool for investing. Some people hate the idea of carrying debt.
Not every strategy will benefit everyone. Investment strategies will vary between individual people.
It all depends on an individual’s psychology. Even though using free cash to invest in other assets could be the more sensical choice, some people may choose to pay for a house outright.
This is a personal choice.
Benefits for the Banks
Handing out super jumbo loans is a huge risk, so banks won’t do so for anyone.
Most of the time, the borrower must be an existing customer. This is a good way for the bank to build customer loyalty. The borrowers are more likely to hold other large assets with the bank if they’re satisfied.
It Takes Money to Make Money
Banks exist to make money just like any other business entity. They put customers’ money to work rather than acting as a sort of safe.
When you make a deposit at a bank, the money goes into a pool with the other customers’ money. The bank credits your account with the amount of the deposit. Every transaction is recorded.
Interest is credited to your account for interest-bearing accounts as a way to thank customers for making deposits.
The bank must keep a certain amount of money as cash on hand or in the federal reserve.
The remaining money can go toward making loans and investments, and some money even ends up deposited in other banks.
The Key Is in the Trust
Banking relationships are built entirely on trust. When I make a deposit into my bank account, I trust the money will be there when I want to retrieve it.
When you think about it, this is terrifying for the customers. Banks consistently extend more credit than the amount they have in cash. If there were to be a run on the bank, there could be a problem retrieving the money.
The trick here is that the banks rely on consumer trust perhaps more than consumers rely on a bank’s trust. Consumers must trust that the banks will act responsibly, with full faith in the banks’ ability to grow and protect their assets.
That’s why banks will sometimes loan large sums of money to the wealthy in order to build a relationship of trust with people who have large assets.
The bank needs to make sure these investments are worthwhile. They will evaluate the health of the real estate market in a specific area before approving a super jumbo loan.
Mortgages on Celebrity Houses
If you ever feel down and out about your mortgage, remember this: wealthy people have debt.
Depending on who you ask, debt can be a great thing. People often use debt as a means of generating more wealth. This is a complex investment strategy that is difficult to wrap your mind around.
Even the most experienced investors hold fear about borrowing money to make money. For those who are lucky enough to hold equity in celebrity houses, taking out a mortgage could be a great business strategy.
Even if you don’t have millions of dollars on hand, you can still grow your wealth with real estate. Check out different types of loans and which might be right for you.