Mortgage lending to high net worth (HNW) clients is a specialised business which poses unique challenges, not limited simply to the scale of the loans involved.
It requires a deep understanding of the unique nature of HNW client requirements combined with an ability to match those requirements with a suitably bespoke mortgage product and process. The particulars will vary from one type of client to another, but the need for a flexible approach to assessing affordability is a common challenge.
Under regular circumstances, it is reasonably simple to consider the affordability of a standard mortgage in relation to a household’s income, but making the same judgment for a HNW borrower can be difficult. This is compounded by the fact that both the mortgage lender and the regulators see affordability as a key aspect in any decision to lend, yet many HNW clients lack regular income and may need to rely on interest-only funding.
To take one example, many HNW clients are entrepreneurs; they have often built up an extensive range of business assets and to a conventional mortgage lender, they lack the steady income to service the loan they seek. Additional challenges arise from the increasing likelihood that a HNW client’s financial affairs will often be complex and multi-jurisdictional; assets may be located in one country and income may be generated in another. There may also be two or more currencies involved, which can present issues with exchange-rates and complications with regard to different legal systems.
An entrepreneur with an international portfolio of business assets and an apparent shortfall in income can put the HNW borrower on the wrong side of lenders’ calculations. When recommending a lender, wealth managers should be aware of the need to work with specialists who are able to assist with the challenges of verifying the source of wealth for those HNW clients who have complicated business interests.
Furthermore, some HNW individuals do present additional complexities, such as non-domiciled UK residents who require a specialist lender to navigate the lending process.
Indeed, some conventional mortgage firms may shy away from making advances against what seem to be an uncertain and confusing set of circumstances. A specialist lender, with expert knowledge and extensive experience would be far better placed to navigate these complexities. These specialist lenders are also more likely to be aware that, when dealing with HNW clients, they should look to enhance rather than detract from the HNW client/ wealth manager relationships.
Whilst gaps in funding from mainstream lenders may be filled by specialists, challenges presented by regulation are sometimes more difficult to deal with.
In June 2014, the Prudential Regulation Authority (PRA) amended previously proposed rules on high loan-to-income lending to reflect the unique nature of HNW borrowers. It accepted that its initial lending limit would have had an unintended, detrimental effect on the business model of lenders to HNW clients and, of course, underscored their view that lending to this distinct client group was a specialised area. Whilst this relaxation is welcome, it remains a challenging aspect of any assessment and was described by the Council of Mortgage Lenders as “modest” and some way off an exemption for HNW borrowers from the post-crisis regime.
Regulatory change is a constant within the financial industry and UK lenders are presently adapting to the increased reporting requirements linked to General Data Protection Regulation (GDPR). There are also more restrictive tax treatments for buy-to-let borrowers still being phased up in 2020.
In the coming months, wealth managers will also need to take account of the expected rise in interest rates, which have been resting at a ten year low. Now faced with an upward trajectory globally, HNW clients will be looking to lock into prevailing rates so as to capture gains into the future and guarantee the servicing costs of their borrowing.
Such developments add another element of complexity for HNW clients and, as a result, the need for bespoke mortgage products is greater than ever.