The market for high-net-worth clients is increasing steadily. While property prices, especially at the top end have slipped recently, properties worth in excess of £1m are a regular sight in agent”s windows and local papers. In 2000 there were just under 1,500 properties sold for £1m or more, but last year the number was in excess of 2,500.
As the clients who buy these properties have – or earn – more money, they tend to be more demanding than most clients. They want preferential rates, good service and quick decisions. Often their finances are more complicated and their incomes may come from a variety of sources.
But for a mortgage broker, large loans are a great source of income. As most lenders base the procuration fee on the size of the loan – the larger the loan, the larger the procuration fee. Generally the same amount of work is needed to place a large loan as with a normal sized loan, and so large loans are more profitable. When a broker asks a lender for an exclusive rate or packaging rights, one of the major considerations is volume of business submitted. By doing large loans, high volumes of business can be delivered without increasing the number of applications. And lenders generally prefer larger loan size to number of applications, as it is cheaper to process one mortgage for £1m than eight for £125,000.
To be successful in the high-net-worth market advisers need to have access to underwriters, exclusive products and to ensure they deliver a high level of service. To place large loans it is important to have the right contacts; if an adviser can speak to the people who make the decisions they can present the facts to them and on occasions persuade them to do cases they would not normally do. Being backed by an established brand such as Hamptons International Mortgages or Savills Private Finance can help in some cases. At the top end of the market brand does matter. For most clients looking to borrow a large sum of money it is advisable to go through a broker as most of the best buy tables do not apply to large loans.
While every broker is keen on large loans, surprisingly not every lender is interested in them. Many have maximum loan sizes typically which range from £500,000 to £1m. For the smaller lenders, large loans simply represent too high a risk. Some lenders publish a limit, which in reality is subject to negotiation.
Many of the large high street lenders have large loans departments. These departments are usually staffed by experienced underwriters used to dealing with high value clients. These underwriters are aware how investment bankers, venture capitalists, and barristers are remunerated. They are normally able to agree most loans straight away, or advise what documentation is needed for agreement. There is nothing worse than trying to place a large case with a small building society and being told that cases that size needs to be referred to the chairman and he is not in until a week on Thursday.
While these underwriters have some flexibility they have to work to normal underwriting limits and income multiples. For example, Cheltenham & Gloucester (C&G) has local underwriting – the local manager has complete discretion up to a certain lending limit. This allows it to take a holistic view of the client, the nature of their job, who they work for, their income, how is it made up, and what their assets and liabilities are. Credit scoring is still very important but while in most cases underwriters have some discretion, if the client gets a low credit score this discretion is likely to be very limited. Private banks, such as Singer and Friedlander, are used to dealing with high-net-worth clients and their needs. They are able to look beyond income multiples and affordability, for them the clients” assets and liabilities are usually the most important items. For clients who are asset rich but income poor, it may even possible to roll up the interest payments and pay them at the end of the loan.
For those lenders who allow clients to self-certify their income, they do not normally lend high values. But there are some exceptions. Halifax and Northern Rock may allow clients to self-certify their income to a maximum of £1m in borrowing. Bank of Scotland may, on occasions, allow clients to self-certify their incomes above £1m.
One factor which is dramatically affected by the size of the loan is the loan to value. For most “normal sized” loans, it is possible to borrow 100% or more of the value. Once you start to exceed £500,000 the maximum LTV starts to decrease. Above £1m if you wanted to borrow more than 80% of the value of a property the choice of lenders would be very limited. Most lenders take the view that, historically, when house prices fall, high value properties price fall most and take longer to sell. The higher the LTV the greater the chance of negative equity. Almost all of the high street lenders will only be able to base the LTV on one property. This is another area where private banks have more flexibility. Unlike high street lenders for whom the only acceptable security is bricks and mortar, private banks can place a charge over other assets. A client can lodge cash deposits with the bank (in a variety of currencies), they can assign shares or other liquid assets. If they have unencumbered properties the bank can take a charge over these.
So far it seems like the high value clients are doing rather well, they have better service and more flexibility, what about rates?
Interest rates are one area where high-net-worth clients generally do no better than a regular client and in some cases they do a lot worse. A few lenders will price products where a minimum loan size such as £100,000 will secure a better rate, but once you get above £1m or even £500,000 for some lenders, the rates available get a lot more restricted. Generally, high-net-worth clients have more complicated needs with their mortgages. Often they receive large bonuses or dividends, they may use these sums to make lump sum reductions. For these clients the ability to have several different rates can be very useful. They can fix part of the their mortgage for security and be able to pay the rest off without penalty.
Looking at the rates, many lenders actually charge a premium on large loans. Abbey and Halifax have certain rates available for loans over £1m, which are considerably higher than their core range. Woolwich charges a 0.5% fee on the element borrowed above £1m. For loans above £750,000 Bank of Scotland charges a £2,500 fee or load the rate. There are only a few lenders who are happy to lend above £1m at their core rates – such as Northern Rock and C&G . Though in most cases, even taking the loading or the fee into account, high street lenders charge less than the private banks.
Typically, a private bank will charge a client a sizeable margin over the LIBOR rate. If a client wants a fixed rate the bank will buy a large enough tranche of money via the swaps market. A private bank will tailor the rate to the clients” circumstances so the lower the LTV or greater the clients assets, the lower the rate. In most cases the bank will charge an arrangement fee of at least 0.5%.
Falling rental yields have hit the high end of the rental market more than other parts of the rental market. It is very difficult now to secure high loan to value borrowing for expensive properties. BM Solutions” criteria says it will lend up to 85% on a purchase price of £1m, but it is rare to find a property which would satisfy the rental income requirement, and the BM Solutions rental calculation is by no means excessively onerous. Lenders like C&G are able to focus more on the income and suitability of the client rather than the rental on the property.
The UK – London in particular – is truly international and there are a great many high value clients who have come here to work, from overseas. Although the majority of these clients are paid in sterling, there are many who are paid in foreign currencies, with the US dollar being the most common. For these clients having a mortgage in the currency they are paid in makes good sense. Generally, if you borrow money in dollars you pay a dollar interest rate and, at present, the US Federal Reserve rate is 2.5% lower than the Bank of England base rate.
High street lenders are not normally able to offer currency mortgages (but their offshore offices can sometimes assist). For high value currency mortgages, the best lenders are private banks – such as Riggs Bank which specialises in lending to high-net-worth US citizens living in the UK.
Large loans do not usually require any additional work but the benefits for advisers can be greater.
Most high street lenders have specialist underwriters who are prepared to be flexible and discreet.
Lenders are more concerned about LTVs as there is a higher chance of negative equity if prices crash.