Strategies for Wealthy Individuals to Navigate the Subprime Mortgage Crisis

But while the rich are best positioned to weather the subprime mortgage crisis, even the modestly wealthy are finding ways to stay on top.

For example, with a balanced mortgage, the money in a checking or savings account is deducted from the mortgage balance, reducing the amount of interest charged each month.

Savings interest is usually subject to income tax. However, with a balanced mortgage, you don’t pay taxes because you don’t earn interest in the traditional way, but instead apply your savings to your mortgage balance.

“People who have large cash flows from asset sales or bonuses and want to reduce their interest burden immediately prefer balanced mortgages,” says Barnett. “It can also be tax efficient.”

Many moderately wealthy customers also choose tailored mortgages that combine different products, according to Welch.

“Some people choose a third on a tracker, a third on interest only and a third on compensation,” he says. “People who borrow more than $1 million have more options and can develop tailored solutions to reduce their debt service costs.”

Megan Riemer, a certified financial planner at Quilter, says one of her clients decided to pay off part of their mortgage when the fixed-rate contract expired. With interest rates significantly higher, the customer paid enough to ensure their monthly payments remained the same. “They had the money, so the sale had no tax implications,” she says.

Older, wealthy homeowners have more influence.

One of Welch’s clients, an engineering contractor in his 70s who lives in the Cotswolds, released £2 million of equity from his £4 million home after paying off most of the mortgage.

“A million pounds was invested in a private bank to generate income to cover interest payments and the rest went to them to enjoy,” says Welsh.