Key to transacting large loans is a close working relationship between the introducing broker and the private banker
Some mortgage brokers are wary of large loans. They have concerns that the finances of high-net-worth borrowers are far from straightforward, the deals are complex and the lenders that serve this sector are primarily private banks and therefore a mystery unto themselves.
Some of this is true – but it does not mean brokers should turn their back on this market.
I am frequently asked the question: what does a typical deal look like? So here is an insight into the type of issues you may have to address when dealing with HNW borrowers.
Although the following example is hypothetical, it is based on the type of circumstances we see on a regular basis. Dealing with several issues in one application is what makes large loans more challenging.
In this example, the borrower is a London-based lawyer working for a large international firm. She has just been promoted to senior partner and received a significant increase in annual earnings to well over £700,000.
As a senior partner, technically she has become self-employed and has had to invest some of her own money into the business. Her firm is headquartered in New York and she receives part of her remuneration package in US dollars.
The borrower has decided to move house but wants to make a double step up to a significantly larger property so that her family will not have to consider another move for the foreseeable future.
Her current home is worth £1m with an outstanding mortgage of £250,000 and she wants to purchase a property worth £3m to see her through to retirement.
The borrower is aware that the market for £3m properties in and around London is extremely competitive and she wants to be in a position to move quickly and buy even before she has sold her existing property.
In summary, here are some of the key issues to be resolved:
- The borrower has just become self-employed and a number of lenders will not lend to the self-employed unless they can show a three-year record.
- Although her income is significant, her outgoings to finance the transaction will also be significant, and at a time when she has to invest in the law firm. She will also incur an increased stamp duty levy because, in effect, she is buying a second home. When her first home is sold (assuming that happens within three years), she will be able to claim back the stamp duty. However, affordability will be a big issue.
- Part of the borrower’s salary is paid in US dollars, which means the mortgage will be classed as a foreign currency mortgage.
- The applicant wants to borrow £2.55m (85 per cent loan-to-value) against her new home, meaning her total borrowing will be £2.8m on two properties worth £4m (70 per cent LTV). Many lenders may not consider financing both properties.
- A £2.8m mortgage is beyond the maximum limit of a lot of lenders.
So how would a specialist bank deal with such a case?
It would take a charge over both properties and, as the applicant’s income is sufficient to cover the combined loans, be happy to take into account her income paid in dollars.
It would also accept a bullet payment when the existing home has been sold and provide an interest-only mortgage for the first five years (to keep monthly outgoings as low as possible), with the loan converting to a capital-and-interest deal thereafter.
The pricing of the deal would be bespoke and based on a lifetime tracker rate. However, when the bullet payment was made following the sale of the existing property, the borrower’s mortgage would step down into a lower-LTV band and her mortgage rate also step down at the same time.
The key to success with deals such as this is usually the close working relationship between the introducing broker and the private banker responsible for the case.
So do not be put off by large loans – they are within the capabilities of most professionals.
Peter Izard is business development manager at Investec Private Banking