We often see very wealthy clients who have significant assets but are having difficulty finding a mortgage due to their income profile. You know the customer profile I’m talking about; you probably meet them a few times a year.
They usually have a large, valuable house, which may have been bought by their parents or inherited. On the accounts side, they tend to have a lot of cash, investments, or pensions. They own a large business but earn little income, or the business is overseas. Maybe they recently sold a business or started a new one after a successful career. They are usually retired or not working.
They would be the perfect customer, if there wasn’t one thing – they have no UK taxable income. Or a meager personal income compared to their needs.
This near-perfect client asks you for a secured mortgage on his house. You know that this is a regulated mortgage and that income is paramount to the whole process. But there isn’t enough of it, it’s not provable, or it’s structured in a way most lenders won’t accept.
Here are our six solutions to help your client secure their mortgage:
Obtain an HNW exemption
Mortgage lenders are allowed to relax the affordability rules for regulated mortgages if a borrower is an individual HNW. This is defined by the FCA as a client with annual net income of at least £ 300,000 or net assets of at least £ 3million.
Some private banks will require an HNW certificate. This document confirms that the client meets the FCA criteria when applying. It can also help smooth things out throughout the process. It is used in place of or alongside the client’s proof of income, to determine if the mortgage is affordable and to show how interest payments could be made.
Some lenders use “cash burn” as a calculation of income. For example, if a client has assets of £ 10million, say in an investment portfolio, which produces a return of 3%. This is £ 300,000 per year which could theoretically be used to pay off mortgage interest, thus meeting the requirements of affordability and ease of service.
Other lenders use common sense – if someone has £ 10million in assets and wants to borrow £ 1million, that’s probably fair enough.
Consider unregulated mortgages for non-UK residents
If the borrower is not a UK resident and the property is only to be used occasionally, lenders are allowed to treat this as an unregulated mortgage. This means that income and affordability requirements do not need to be fully assessed in the same way as a regulated mortgage.
One example is a Middle Eastern resident who buys property in Mayfair to use it for his and his family’s vacations. Although this is a property that he will personally live in, it is not a regulated mortgage under FCA definitions.
So, again, lenders can look at the customer’s entire situation in deciding whether or not to grant a mortgage. This includes their liquid and illiquid assets, their property and business assets, or even their reputation or family ties. Personal income can also be part of the underwriting process, but the lender can lend without having to prove a certain level or assess fuller affordability.
This is a great solution for international HNWs who are buying a property as an investment and not for pre-defined reasons such as a house or buy to rent – lenders who offer it are very rare.
Opt for prepaid mortgages
Another way to meet income and affordability requirements under a regulated mortgage contract is to prepay interest for the term of the contract. If the mortgage is prepaid, there is no need to show how the monthly payments would be met. There is therefore no requirement to prove income at a level to meet FCA affordability rules.
For example, suppose the client is looking for a mortgage of £ 1million at a fixed interest rate of 3%, with a term of 5 years.
Here the customer would put £ 150,000 with the bank on completion (£ 1,000,000 x 3 percent – £ 30,000, x 5), which would be held in an escrow account for the term of the mortgage. These funds are then used to pay monthly interest as it becomes due.
There are a few things that you need to be aware of if you want to try this method. Often times, lenders want to see enough income to cover the borrower’s lifestyle and living expenses, as well as other background assets.
There are very few lenders that will offer this solution, and it should be part of a longer term strategy rather than being used in isolation. For example, this could be used to cover the first few years of a new job where premiums are expected to increase. Or it could be used for an entrepreneur who has sold a business and is starting a new business.
Find securities lending options
Sometimes we look to other assets to find a solution to clients’ mortgage needs. This can take the form of a security backed loan – sometimes referred to as a Lombard loan.
For example, we guarantee the loan against the client’s cash – say an investment portfolio, stocks and stocks or other securities. It is a large market, dominated by private banks and many specialist lenders. Interest rates can be very low if the security is of high quality (eg £ 10million of Facebook shares). Or can be valued according to the risk for other share classes (for example, unlisted shares before the IPO or high loan-to-value ratio)
Typically, loan values are less than 60 percent for individual stocks. And they can go up to 95% for very liquid assets (cash or Facebook shares). Interest rates will be between 1 and 4 percent. Interest only and loans are based on the security offered rather than the profile (income) of the borrower. This could be a great option for the wealthy, low-income client.
Try a counter-billed or alternative title
Another example is looking at non-residential / regulated properties and seeing if they can be used as part of a collateral package for a mortgage or as a separate transaction to raise the necessary funds.
For example – commercial property, buy to rent investments, overseas property and so on. There may be a better opportunity to increase the mortgage on a property held in France or Spain and use those funds for the UK transaction.
Bridge financing could be the best solution
If all else fails, there is always bridging funding. But this needs to be used in a very controlled and thoughtful way, focusing on how the bridging loan gets excited as soon as possible.
Regulated bridge financing always requires an analysis of income and affordability; however, this can be worked around by allowing the interest to accumulate or be paid on the repayment of the loan.
An example of why bridging finance could be used is if a low-income, HNW homeowner needs cash for a short, predefined period of time – to make a business investment or pay a bill before the committed funds fail. enter.
The UK mortgage market can be very rigid in many ways, especially when it comes to the regulated aspects. However, there are solutions available for HNW and international borrowers. I have listed the six best proven methods here. But of course, nothing beats an experienced mortgage broker who truly understands the market and the client.
Islay Robinson is Managing Director of Enness Global Mortgages