Penelope Mackenzie was born in Tangier, the daughter of Colonel Alexander Mackenzie. As a young woman she was sent to stay at the Jacobite court in exile in Paris, where she met Allan (or Ailean) MacDonald, Chief of the Clan Ranald. The two married, and in 1696 returned to Allan's ancestral home in the Western Isles. This was at Borgh Castle, on the south side of the island of Benbecula. Penelope took an immediate dislike to the castle, and in 1701 Allan MacDonald began work on a more modern castle on South Uist.
Ormacleit Castle was completed in 1708, and the family moved into it. The life they lived reflected their earlier experience in the Jacobite royal court and Ormacleit Castle, complete with a bard and a piper, has since come to be regarded as one of the last examples of the flowering of traditional Gaelic culture. It also became a centre for Jacobite sympathisers, and after taking part in the 1715 uprising, Allan MacDonald was killed at the Battle of Sheriffmuir on the 13 November 1715. By most accounts the fire that destroyed Ormacleit Castle took hold on the evening the battle took place, and was accidentally started in the kitchen where a side of venison was being cooked.
With Allan dead and many of his male relatives in exile, Penelope took over the running of those parts of the vast Clan Ranald estates that had not been confiscated by the Government. Through her own family connections she was able to gain the support of the Duke of Argyll for the estates to be returned to the MacDonalds in 1727, though the income the estates generated was never enough to clear all the accrued debts. Penelope is remembered for doing much to support the continued dominance of Roman Catholicism in the southern half of the Western Isles, and "Penelope" continues to be a popular girls' name in South Uist.