When it comes to assessing affordability, there are a few distinct differences between the needs of mainstream and high net worth borrowers.
The latter typically possess considerable assets, but may have varying incomes and as such they do not always fit within the mainstream affordability mould.
This is why when the Mortgage Market Review was implemented more than four years ago, the ‘high net worth waiver’ was a welcome proviso. This waiver allows for high net worth clients – those with an annual income of at least £300,000, or net assets of £3m – to be assessed differently to mainstream borrowers.
Instead of judging affordability based solely on the client’s income and expenditure, the waiver permits lenders to also take into account their assets.
High net worth clients’ finances are often more complex than mainstream mortgage applicants due to their irregular incomes, bonuses and substantial funds tied up in stocks, shares and property.
At Investec Private Bank our starting point is always to still assess all applications through the normal Mortgage Conduct of Business affordability rules.
There are however circumstances when for the right client we can apply the exemption.
For example, we were recently able to assist a client whose net asset value was over £18m – and yet without this waiver they would have fallen short of the standard affordability requirements.
The client was looking to buy a £3m London property and wanted to borrow £1.5m on an interest-only basis for 10 years. The client had substantial wealth, but his main income was derived from a business that was in the process of being sold, and as such was not sufficient to meet the mortgage repayments.
Post purchase of the business however the client would have liquid reserves – around £2.5m in cash and a further £9m in shares – following the sale of the company.
In such a scenario the client posed a low risk due to their substantial assets and we were able to offer them the flexibility they needed.
Utilising the high net worth waiver is very much the exception rather than the rule for us, yet as with all of the regulator’s waivers, they are designed to be used for the right client and when done so correctly can assist good quality low risk borrowing.
Peter Izard is business development manager at Investec