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In the last few years, large mortgages above £1,000,000 have been perceived by consumers and estate agency negotiators to be ‘specialist products’, only available from a select number of lenders, typically private banks.
High street banks’ appetites to lend larger sums declined substantially after the credit crisis, as they focused on smaller, ‘lower risk’ mortgages. However, appetite is growing again among mainstream lenders and we have recently noted a shift away from private banks back towards certain high street banks, who can offer rates as low as 0.79% over the Bank of England Bank Rate (known as the ‘base rate’) for a tracker mortgage or 2.19% for a 5 year fixed rate product (subsequent rate 3.99%, overall cost for comparison 3.4% APR, arrangement fee of £1,499).
There is still a key role for the private banks to play, as the Financial Conduct Authority (FCA)’s Mortgage Market Review (MMR) has introduced constraints on how this sector of the market now functions. In particular, the hurdles that borrowers must clear in order to prove that their loan is “affordable” have increased significantly. The mortgage must now be considered alongside the borrower’s outgoings and repayment strategy and some lenders even assess interest-only mortgages on a stressed capital repayment and interest basis, making it difficult for borrowers approaching retirement to raise a mortgage.
High street lenders must now follow strict rules about their lending approach with every borrower, whether or not they are a High Net Worth (HNW) individual. Private banks and other specialist lenders can apply more flexibility when assessing a borrower’s ability to repay the loan. This flexibility can be applied if a borrower meets the High Net Worth exemption criteria of either a net annual income of £300,000 or net assets of £3m.
The FCA sets out in its MMR paper;
“High net worth (HNW) individuals are usually asset rich so lending decisions will be determined by the repayment strategy (how ultimately they intend to repay the borrowing, and how achievable this is) rather than the monthly repayment plan or amount.”
If a borrower meets the above HNW exemption hurdle it allows lenders to base their lending decision more on a client’s overall wealth rather than solely their income to repay the mortgage. This could consist of a future sale of their business, investments charged with the bank or sale of investments. This form of underwriting is key for HNW individuals who more often than not have fluctuating, non-standard incomes.
A client was seeking to refinance their mortgage of £1,500,000 with the aim of reducing the existing rate from approximately 5% and release equity in order to purchase a Buy to Let property.
The client had various investments, including wine, collectable cars and a property portfolio. His main residence was worth in excess of £6,000,000. However the client’s annual income was less than £175,000.
We were able to refinance the client’s main residence with a mortgage of £3,000,000 (17 x income) at the same cost as his existing mortgage of £1,500,000.
The lender was able to offer this solution as the client was able to demonstrate his ability to repay the mortgage by the sale of investments and met the FCA’s High Net Worth exemption criteria because his overall net worth was in excess of £3,000,000.
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