With a portfolio of assets worth many millions of pounds, one may assume that securing credit would be a straightforward task for a high net-worth (HNW) individual. The reality can be quite different.
The unique nature of a HNW’s wealth – their incomes, investments and liquidity – puts this group of peple at a surprisingly high risk of being turned away by conventional lenders. This is certainly true in the mortgage market. What’s more, it is an issue that has become more prevalent over the past decade.
So why are even the wealthiest members of society refused mortgages by banks? And what must HNWs themselves do in order to ensure they are able to access credit when they need it?
Tightening mortgage regulation
One of the most notable trends in the mortgage market over recent years has been the tightening of regulations. It is something that has affected first-time buyers, buy-to-let landlords and HNW individuals alike.
The onset of the global financial crisis in 2008 saw many conventional lenders become more risk averse. Rightly keen to avoid mortgage defaults on a large scale and adopt a more scrupulous approach to deciding whom to lend money to, the methods applied to assessing mortgage applications became stricter and stricter in the years following the economic crash.
At the same time, regulatory changes have also been introduced; in recent years there have been numerous amends to mortgage regulation, including the ‘Mortgage Market Review’ in 2014 and ‘Mortgage Credit Directive’ in 2016, to name two of the more prominent.
The result of the new regulation, coupled with the more conservative approach of the lenders, has been that a greater number of people are turned down when applying for mortgages. That in itself is not necessarily a problem; developments to ensure only suitable candidates are able to access sizeable loans is essential to protect borrowers, lenders and the property market as a whole.
However, for HNW borrowers the aforementioned shift in how mortgage applications are assessed has created new challenges. Specifically, during the increasingly “tick-box” centric methodology of mainstream mortgage providers, wealthy individuals can often fail to meet pre-defined criteria; typically because such an approach does not take into account the complete financial profile of the applicant, but instead requires them to satisfy a very particular formula.
The irregular incomes of HNWs
One of the most common reasons a HNW individual would fail during the mortgage application process with a high-street bank, for example, is that they have an irregular source – or sources – of income. More complicated still, they might not have any income to speak of.
This is not uncommon among HNWs. Indeed, often the wealthier individuals are, the more complicated their finances become, and this can include them having no monthly pay cheque to prove to lenders that they have a set income.
For the rich and the super-rich, their wealth might be inherited, while their income could come from a variety of investments. To make things a little more complicated, their assets could be held inside trusts and other structures. Alternatively, their investments could be spread across numerous territories.
When these various factors are combined, one can understand why mortgage providers who lack the experience of working with HNW clients are often unable to lend to such individuals. That is why specialist lenders, who have in-depth knowledge of this group and are adept at carefully considering a wealthy borrower’s unique personal circumstances, have such a vital role to play, particularly at the very top end of the UK’s property market.
Understanding their motives
Further to the complicated, irregular incomes and financial profiles of HNWs, mortgage providers face another challenge when working with these clients: understanding their motives.
The mortgage a HNW individual requires is rarely to buy a property that will be their sole residence. Moreover, it is often not even going to be their primary residence and they may have no intention of living in it at all.
Bricks and mortar remains one of the most popular investment asset classes among wealthy individuals. But beyond treating a property as an investment, there are many other reasons they might purchase a luxury house or flat; it could be used as a holiday home, for example, or somewhere for a child to live while studying at university. This can prove to be an issue. Indeed, if a HNW is seeking a mortgage for a property that he or she does not intend to live in, some lenders will be hesitant in providing the necessary capital.
At this point, one might ask: why would a HNW individual even need a mortgage in the first place?
The reality is that some HNWs own significant assets but lack access to the upfront capital needed to buy a multi-million-pound property. Others, meanwhile, want or need to maintain their liquidity rather than investing it all into a real estate purchase.
Developing a detailed and holistic picture of the borrower is, therefore, important for lenders and brokers alike when working with HNW clients. Not only must mortgage providers take the time to understand the precise financial profile of the individual, but they must also know their motives for buying the property in question and the individual’s plans for it.
A lack of transparency from the borrower can be an issue, but typically it is a question of approaching a suitable mortgage provider that has experience working with wealthy individuals who are buying properties for any number of reasons.
Brexit not derailing demand for HNW mortgages
Brexit: we cannot escape it, whatever the topic we are discussing. Predictably, the B-word continues to dominate political discourse, and it will do for some time yet.
But will the UK’s withdrawal from the EU – or more pertinently, the uncertainty it causes – impact HNWs looking to invest in the country’s property market?
Signs since the EU referendum suggest that Brexit has not prompted a mass exodus of wealthy buyers away from bricks and mortar investment in the UK. In fact, demand among domestic and foreign buyers for high-end properties has held strong, particularly when it comes to prime central London (PCL).
Figures released by HMRC in January 2019 showed there was a 50% increase in the number of homes sold for over £10 million between the start of 2017 and 2018. Moreover, in that same 12-month period, the number of homes that sold for more than £1 million exceeded 20,000 for the first time. The majority of these are within the PCL market.
Anecdotal evidence would certainly tell you that some HNWs have adopted a “wait and see” mentality, waiting for the Brexit fallout to pass before buying or selling a property. But the HMRC data illustrates that interest and activity remains at healthy levels. Furthermore, the level of demand still present at the top of the London market is supported by predictions from Savills, which has suggested that PCL property prices will grow by 12.4% between 2019 and 2023.
It means that there are still many wealthy domestic and foreign buyers requiring financial products, such as mortgages and remortgages, as they seek to consolidate or expand their property investment portfolios.
In the months ahead, as the Brexit deadline comes and goes, it is important that specialist lenders continue to support HNW property buyers. This will, in turn, enable the prime property market to remain fluid and stride confidently into the post-Brexit world.
Source: Mortgage finance Gazette