No industry is immune to political and economic trends, and the UK’s mortgage market is certainly no exception and so we are seeing mortgage problems for high net worth individuals.
Over the past decade, since the onset of the global economic crisis, one of the most notable trends has been to drastically reduce the level of risk to which lenders expose themselves. They have achieved this by using a stricter set of criteria to assess an individual’s financial situation before approving a loan.
This shift has invariably made securing a mortgage more difficult across the board, which should not be seen as an issue in itself. After all, risk must be managed with utmost care in the finance sector. However, the change has posed a particularly significant challenge for high-net worth individuals (HNWIs).
The new lending culture effectively advantages those who have straightforward finances, including a regular income and a limited number of easily liquidated assets. This tends not to be the case for very wealthy individuals who rarely derive the majority of their net-worth from traditional sources of income.
It can be the case that “the wealthier an individual, the more complicated their finances”, because it’s common for a HNWI’s portfolio to be split across many different asset classes and jurisdictions, while his or her income can be irregular or even non-existent.
A lack of conformity can make HNWIs appear a high-risk proposition for some lenders, particularly those who are not well-versed in the intricacies of lending to such individuals. Consequently, super wealthy people looking to secure a mortgage are typically better off seeking out a financial provider who will take a more holistic approach to assessing their finances.
What marks out HNWIs?
Often we hear that HNWIs, denied an overdraft or refused a credit card. But what characteristics mark out HNWIs as potential risks to a cautious lender?
The first thing to note is the change in criteria that, post-2008, most lenders use to assess mortgage applications. Lenders generally seek to mitigate against defaults by strictly adhering to a set of clearly defined criteria that are usually evident among individuals with solid finances such as a full employment history and total disclosure of sources of regular income.
The most significant change in the regulation of the UK mortgage industry comes in the form of the 2014 Mortgage Market Review. The legislation requires lenders to implement a financial stress test, which means lenders have to be satisfied prospective borrowers have sufficient and reliable income, because defaults are less likely from borrowers whose finances are stable and predictable. For advice on getting a mortgage the Financial Conduct Authority offers this.
Largely, lenders have been right to adopt this practice but it has been detrimental to HNWIs who, despite their wealth, often lack a regular income and might have taken on some liabilities in order to maintain a sizeable property portfolio.
HNWIs can be frustrated by the way these market changes have negatively impacted them accusing banks of applying ‘tick-box’ methods when assessing mortgage applications, failing to adequately account for personal circumstances.
Of course, the intended aim of these measures was not to inconvenience HNWIs but rather to ensure lenders were not taking on irresponsible risk. The problems arise as a result of a lack of flexibility.
Ultimately, many lenders lack the resources or motivation to tailor their business practises in such a way as to provide a service that caters to HNWIs while also being compliant with the new regulatory framework that governs UK mortgages.
How does this impact the housing market?
That lenders generally adopt this tick-box approach is not simply a source of frustration for the individuals who miss out. The UK property market also takes a hit when potential buyers cannot access the finance they need to make new acquisitions or leverage existing assets. If investors are unable to secure mortgages to expand their portfolios then this will have a stultifying effect on the market.
We have found that many HNWIs believe it has become increasingly difficult to secure mortgages for non-primary residential purchases and that their difficulty in securing a mortgage stems from the fact their capital is tied up in existing real estate investments. Not only does this create a real headache for property investors, it also undermines consumer confidence in that property investors often do not believe high street banks adequately cater to their needs.
What should HNWIs do?
The key to overcoming these obstacles lies in recognising that, as an HNWI, you are an irregular client. This means finding a lender with the requisite practical experience and skills to adapt their services to yourspecific circumstances. There are many established lenders who have the expertise to adjust their financial offering to a HNWI’s situation, and this is necessary when it comes to securing mortgages.
Crucially, these lenders understand that wealthy individuals have complex finances that require a flexible approach. By partnering with the right provider, HNWIs and property investors can avoid going through the rigmarole of unsuccessful applications and enable them to find mortgages so they can expand their property portfolios.
Alpa Bhakta is the chief executive officer of Butterfield Mortgages Limited
Further reading: Mortgages – why 80 is the new 60 as far as lenders are concerned