We often see clients who have considerable assets and are very wealthy but struggle to find a mortgage due to their income profile, which can look something like this:
Income is paramount in the process of arranging a mortgage secured against a home, especially as such mortgages are regulated.
What are the options when there’s not enough income, it isn’t provable or structured in a way that most lenders will accept?
Here are a few ways in which Enness deal with this situation:
Mortgage lenders are permitted to loosen affordability rules on regulated mortgages If a borrower is an "HNW individual’’ (defined by the FCA as "a customer with an annual net income of no less than £300,000 or net assets of no less than £3,000,000 ).
Some private banks will request an HNW certificate to confirm that the client meets these criteria during the application. This document is then used instead of or alongside the client's proof income in determining whether the mortgage is affordable and showing how the interest payments could be met.
Some lenders use "cash burn" as the income calculation. For example, if a customer has assets of £10m, say in a share portfolio, which produces a 3% return. This is £300k per annum that notionally could be used to service the mortgage interest, satisfying affordability and serviceability requirements.
Other lenders use common sense – if someone has £10m in assets and wants to borrow £1m, that is probably fair enough!
If the borrower is a non-UK resident and the property is only to be used occasionally, lenders are permitted to treat this as an unregulated mortgage, which means income and affordability requirements need not be fully assessed.
An example is a Middle East resident who buys a property in Mayfair to use for his and his family’s holidays. Whilst this will be a property which he will personally live in, this isn't a regulated mortgage according to the FCA definitions.
So, again, lenders can look at the client's entire circumstances, liquid and illiquid assets, property, and business holdings or even reputation or family connections in deciding whether to grant a mortgage. Personal income can be part of the underwriting process, but the lender can lend without having to prove a certain level or assess more comprehensive affordability.
This is an excellent solution for international HNWs who buy property as an investment and not under predefined reasons such as a home or a buy to let.
Another way to satisfy income and affordability requirements under a regulated mortgage contract is to pre-pay the interest in the agreement's duration. If the mortgage is paid in advance, there is no need to show how the monthly payments would be met, which follows there is no requirement to prove income at a level to satisfy the FCA's rules on affordability.
Here the client would put £150,000 with the bank on completion (£1,000,000 X 3% - £30,000, X 5), which would be held in a locked account for the mortgage duration. These funds are then used to pay the monthly interest as it becomes due.
Often lenders would want to see enough income to cover the borrowers' lifestyle and living expenses and often other assets in the background.
There are very few lenders who will offer this solution, and it needs to form part of a longer-term strategy rather than used in isolation. For example, this could be used to cover the first few years of a new job where bonuses are expected to grow, or for an entrepreneur who has sold one business and is starting a new venture.
Sometimes we look to other assets to find a solution to the clients' mortgage needs, and this can come in the form of securities backed loan – sometimes referred to as a Lombard loan.
For example, we secure the loan against the client's liquid assets – say an investment portfolio, stocks and shares or other securities. This is a big market, dominated by private banks and a large number of specialist lenders. Interest rates can be very low if the security is high quality (i.e. £10m worth of Facebook shares) or is priced for risk for other share classes (for example, unlisted shares pre-IPO or high loan to value).
Generally, loan to values are less than 60% for single stocks, can go as high as 95% for very liquid assets (cash or Facebook shares), interest rates will be between 1 and 4%, always interest only and loans are based on the security on offer rather than the profile (income) of the borrower.
Another example is to look at non-residential/ regulated property and see whether they can be used as part of the security package for a mortgage or as a separate transaction to raise the required funds.
For example – commercial property, buy to let investments, overseas property and so on. Maybe there is a better opportunity to raise the mortgage against property owned in France or Spain and use those funds for the UK transaction.
If all else fails, there is always bridging finance, but this needs to be used in a very controlled and thought-out way, focusing on how the bridging loan is exited as soon as possible.
Regulated bridging finance still requires an analysis of income and affordability; however, this can be sidestepped by allowing the interest to roll up or be paid on the loan's redemption.
An example of why bridging finance could be used is if an HNW homeowner, with low income, needs liquidity for a short term and predefined term – to make a business investment or pay a bill before committed funds come in.
The UK mortgage market can be very rigid in many respects, especially when it comes to regulated aspects – however, as above, there are solutions available for HNW and international borrowers.