Of all the people likely to face significant challenges when attempting to secure mortgages, you may be surprised to know that high net-worth (HNW) individuals often find themselves at an immediate disadvantage.
While their financial worth may total millions and millions of pounds, the inherently complex nature of HNWs’ investment portfolios can present significant problems for conventional lenders who simply do not possess the knowledge or expertise to handle such complicated mortgage applications. This means that even the super-rich are being turned away from high-street banks for reasons that are, in reality, no fault of their own.
The question beckons: why are banks unable to service the needs of HNW individuals when it comes to credit? And what are the options left for those in need of mortgages to complete property acquisitions?
Regulatory measures have made banks less limber
Following the onset of the global financial crisis in 2008, many lenders became much more risk averse when it came to credit applications. For first-time buyers through to seasoned property investors and HNW individuals, the process of applying for mortgages became more time-consuming and complicated. Such a risk averse approach means that many lenders now prefer to rely on rigid “tick box” approaches when it comes to mortgage approvals.
The introduction of new policy measures has catered to the rise of a more stringently regulated mortgage industry. Two of these most prominent regulations have been the “Mortgage Market Review” and “Mortgage Credit Directive”, which were introduced in 2014 and 2016, respectively.
It is important not to overlook the need for regulatory policies to ensure lenders are extremely diligent when it comes to approving mortgage applications. They play a practical role in protecting borrowers and lenders alike, as well as instilling confidence in the property market as a whole. Nonetheless, the risk averse approach adopted by mortgage providers has brought with it a host of new challenges for HNWs, which can undermine their ability to access property opportunities.
Understanding the irregular incomes of HNWs
One of the most common reasons why a HNW is turned back by mainstream lenders has to do with his or her irregular sources of income. When banks consider mortgage applications, there are a variety metrics used to inform their decisions, ranging from an applicant’s employment status and existing debt through to credit history and sources of income. The reality is that a significant number of HNWs do not receive a monthly paycheque, making it difficult for them to prove they have a set income that can be documented by conventional lenders; indeed, some may not have an income at all.
For some wealthy individuals, income may be sourced from a multifaceted financial portfolio spread across various assets, such as trusts and bonds, while for other younger HNWs, the wealth may have been inherited. Typically, the wealthier an individual is, the more complicated his or her finances are, and irregular sources of income can deter banks when assessing mortgage applications.
It is understandable why mortgage providers who do not have the experience of working with HNW clients decide not to lend to such individuals. However, a lack of expertise from a lender should not put the wealthier segments of society at a disadvantage. As a consequence, mortgage providers who specialise in dealing with the specific needs of HNW individuals have risen in prominence, demonstrating a keen knowledge of the nuanced situations typical of HNW clients in need of credit.
Why do HNWs need mortgages?
Given the amount of assets HNWs typically own, one might wonder why they would need a mortgage. The reality is that for the majority of these clients, the ability to transform these assets into cash can be incredibly difficult, costly and time consuming. Others might prefer not to use their liquid capital to fund a property investment.
Instead, HNWs applying for mortgages use their securities as leverage––an approach understood by mortgage providers who specialise in this market.
It is unfortunate that – faced with a seemingly complex case – the majority of lenders would prefer to turn down wealthy individuals’ mortgage applications rather than consider how they can help service their needs through a more bespoke approach. In the long term, such lenders face the reality of being outpaced by new trends, failing to embrace the changing demands, and profiles, of prospective borrowers.
Thankfully, there are mortgage providers who specialise in the provision of mortgages for HNW clients, ensuring they are positioned to purchase properties for a variety of reasons.
Alpa Bhakta
Alpa Bhakta is the CEO of Butterfield Mortgages Limited. Part of the Butterfield Group and a subsidiary of The Bank of N.T. Butterfield & Son Limited, Butterfield Mortgages Limited is a London‐based prime property mortgage provider with a particular focus on the needs of UK and international HNW individuals.
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