These days, many couples and individuals have six or seven-figure wealth tied up in property, businesses, stocks, securities or investments and luxury assets but have little immediate liquidity, capital or income in comparison to the value of their overall net worth. Although a common scenario, this poses a real challenge when it comes to accessing a mortgage.
‘Asset-rich, cash-poor’ scenarios often arise for logical reasons. In many cases, you will have made a strategic decision to invest regular income or a lump sum generated through a liquidity event into appreciating assets or high-ROI projects. Alternatively, you may deliberately draw down relatively little income to limit your fiscal liability because you don’t need a significant income to cover your daily living expenses. The issue, however, when it comes to buying property, is that lenders tend to focus on your income to determine how much you can borrow for a mortgage, and despite your overall wealth, you may find you can’t access a mortgage that will allow you to buy the property you want or that reflects your overall net worth.
There are, however, several different options Enness can help you explore if you want to get a mortgage and you’re in a situation where you have significant assets but little income.
High-net-worth Exemption Mortgages
Most lenders - especially high street banks - offer regulated mortgages as standard, which means you must meet specific affordability criteria (usually calculated based on your income) to secure a mortgage. However, lenders, predominantly private banks, can also offer what’s known as a high-net-worth ('HNW') exemption mortgage. To be eligible, you’ll usually need a net worth of £3 million or more (excluding the value of your primary residence) and a net income of £300,000.
We can often broker a more significant mortgage based on your overall net worth if you meet these requirements.
While HNW exemption mortgages can be a solution in many instances, they aren’t ideal in all scenarios: you may not meet the requirements in terms of minimum annual income, for example. An alternative option Enness can explore for you is prepaid interest mortgages.
Here, you will pay some or all of the interest to your lender in advance, giving the lender more comfort in your ability to cover capital repayments, given the interest is already covered. You will prepay interest upon completion of your property transaction, which is held by the lender for the loan term. The lender will then deduct the interest from this account (usually every month) as it’s due.
Prepaying interest means there is no requirement to prove you meet the usual criteria for income in line with FCA regulations, effectively opening up a route to a higher-value mortgage and reducing what you will pay every month.
However, it’s important to note that lenders will still want to ensure you can cover the principal loan amount and that your income amply covers any liabilities, including monthly mortgage payments. Lenders also want to see a justification for this kind of loan, and these mortgages can usually only be used in specific scenarios: if you have a good amount of capital available to prepay interest, but your income is expected to grow considerably over a few years, for example. Prepaid mortgages can be ideal if you’re setting up a new business that will generate significant income over time (especially if you are a career entrepreneur with a track record of setting up successful business ventures) or can show a career trajectory that will see you earning considerably more in an annual salary or bonus’ within a couple of years, for example.
Securities-backed lending isn’t always thought of as a route to property finance, but it’s a very viable solution for many high-net-worth individuals, who often have considerable wealth tied up in securities and stocks and who choose to invest as much as possible in their investments, retaining minimal cash reserves.
In these cases, we can use your liquid assets (investment portfolios stocks, shares in privately-held businesses and pre-IPO stock) as collateral for a loan. Interest rates can, in some cases, be more competitive than comparable mortgages for the same amount if you have A-grade stocks, and this type of lending means that you don’t have to sell your securities to raise the capital you need to buy a property. This allows you to retain ownership of your stocks, benefitting from the expected long-term appreciation in value and circumventing potential fiscal liabilities like capital gains tax.
The loan-to-value (LTV) ratio will depend on the stocks or investments you hold: a portfolio of very liquid stocks may see us able to negotiate a higher LTV than we can using a single line of unlisted stock as collateral for a loan, for example. If you have a significant net worth but a low income, the benefit of these loans is that lenders will usually assess your suitability for a loan based on your securities and profile rather than your income in exclusivity. However, your plan to exit the loan and meet monthly repayments is critical.
In some cases, cross-collateralised mortgages (sometimes known as cross-charging) can also be an option.
Cross-collateralised mortgages will see a lender use one or more assets already used as collateral for a loan as security for a subsequent loan that you can use to buy a property. This means you can leverage the equity you have built up in existing assets to access finance, even if they are already security for a loan. One of the benefits of cross-collateralised mortgages is that you may use a ‘mix-and-match’ approach and use different asset classes, such as residential and commercial real estate and luxury assets like art or yachts, to secure a loan to buy property.
Cross-collateralised mortgages are only offered by a few lenders and only in particular scenarios: usually, if you have a very significant net worth, if you are in a solid overall financial position, and your lender is very sure of your ability to repay the loans based on your global assets and your calibre as a borrower. As a result, they are generally only available to ultra-high-net-worth individuals with exceptional financial backgrounds. They are generally an option when you want to use debt strategically (i.e., you want to utilise equity in various existing assets to raise finance rather than sell assets, liquidate investments or increase a ‘salary’ paid through corporate structures to access the capital you need) as opposed to being an option when you can’t afford a mortgage any other way. Another advantage is that you can use multiple assets in different jurisdictions for a single loan, which is helpful if you have multiple properties or assets in various locations.
If you can’t repay the loan, you stand to lose the assets, with the first charge lenders being repaid first and second charge lenders after that. Therefore, these deals need to be brokered exceptionally carefully, and the risks and advantages weighed at length. Lenders don’t offer these mortgages as standard, often preferring introductions from brokers like Enness, who have vetted your suitability for a loan. Again, we will need to provide concrete details of why you are a suitable borrower for this type of mortgage.
Alternative Securities And Montetisation Of Liquid Assets
In some cases, we can use different types of collateral that will allow you to raise the capital you need to secure a mortgage, even if you have little income. Here, we will assess your assets to identify how to get you the capital you need at the most competitive rates. Sometimes, we can arrange a loan using different asset classes as collateral.
Many high-net-worth individuals have global property portfolios, and if this is the case in your situation, we can often use these as collateral for a mortgage. We can also consider arranging a loan against luxury assets such as art, although these items are less liquid than prime property, making using them as security more challenging. We also regularly work with business owners and entrepreneurs to identify which assets owned by a business would allow you to unlock capital, carefully arranging the deal to ensure it’s structured properly with regards to corporate entities and ownership, ensuring there’s no blurring of the lines between personal and business loans and liabilities, which is always beneficial.
The possibilities for using alternative securities, rather than property, as collateral for a loan are almost endless. Collateral in the form of cash or foreign currency reserves, bonds, gold bullion and cryptocurrency can also be arranged, and the more liquid the asset, the easier it will be for us to source you an exceptional deal.
This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation. Financing options available to you will depend on your requirements and circumstances at the time. Any changes in your circumstances, any known likely changes, or omissions in the information you provide can affect the suitability of the options available to you. These should be communicated to us as early as possible.
If you are considering securing debts against your main home, such as for debt consolidation purposes, please think carefully about this and consider all other options available to you. Your home may be repossessed if you do not keep us repayments on your mortgage or other debts secured on it.
Enness does not give advice on Securities Backed Lending or Luxury Asset Financing, and lender introductions are unregulated. This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation and is not an invitation to buy or sell securities.
Corporate financing and lender introductions are unregulated.