Applying for mortgages can often pose significant challenges for people who do not neatly comply with the rigid criteria typically employed by mainstream lenders. Banks have become more risk averse in their approach, and this often means those with non-traditional incomes face delays, and in some cases, declines.
While this is something most people are aware of, it may come as a surprise to note that high net-worth (HNW) individuals can find it particularly difficult to acquire credit. At first glance, this seems like a paradox; why would HNWs who own millions of pounds worth of assets face challenges when applying for mortgages?
There is no simple answer to this question. Nonetheless, to fully understand the issue one must take into account the current trends shaping the UK mortgage industry; there are a number of identifiable factors that explain why conventional mortgage providers are reticent to lend to HNW individuals.
Handling complex financial portfolios
When considering mortgage applications, conventional lenders look to a number of financial indicators to assess the risk involved. And to determine risk, lenders will revert to the traditional metrics such as credit scores, income, employment history and an applicant’s existing debt. For the majority of applicants, these indicators will be inputted into an equation that will establish if he or she is a suitable candidate.
For the many borrowers, this “tick box” approach offers a straightforward path to a mortgage. Yet, when it comes to the complex nature of HNWs and their unique financial profiles, conventional lenders can be overwhelmed. For example, HNW individuals often do not have regular incomes and so, despite owning multiple assets, can be denied mortgages.
Typically, the wealthier an individual is, the more complicated his or her finances become, and for many banks, undertaking the due diligence on HNWs can prove a time-consuming and complicated process. Indeed, some lenders lack the resources and expertise to assess applications from HNWs, which means they cannot serve this particular market.
Knowing the client
One question often asked by lenders is why HNW individuals should need mortgages. One may assume that they should already have access to capital because of their investments and assets. While this may seem like a valid question, the ability to transform such assets into cash can often be a very complex process. Moreover, others might not want to use all their liquid capital to finance a property investment.
For example, a HNW individual’s assets could be spread across a variety of different classes, ranging from trusts and bonds to stocks and shares. What’s more, some of these assets could be illiquid in nature, meaning that the security cannot be easily sold or exchanged without risk of losing substantial value. Rather than venture down this route, it makes more sense for the HNW individual to leave his or her securities, and instead leverage them to access a mortgage.
There are other circumstances that can be even more nuanced, and this is particularly true when considering London’s prime property market. International borrowers seeking a loan above £1 million to purchase a house in the UK can face extreme difficulties, with conventional lenders not taking into account their credit histories in their local jurisdictions. This can mean that wealthier international borrowers miss out on acquiring homes due to delays or declined mortgage applications.
Conventional lenders take a step back
It would be wrong to believe that the barriers typically encountered by HNWs are solely the result of their complicated financial circumstances; the lenders are also responsible, with new mortgage regulations making the process of securing capital more difficult.
In response to the global financial crisis, the mortgage industry has witnessed a wave of new regulatory measures. This has included the “Mortgage Market Review” in 2014 and “Mortgage Credit Directive” in 2016. The result has been a more stringent and rigid banking environment, making it difficult for lenders to adopt a creative and flexible approach when considering mortgage applications.
Of all the contributing factors, it is important to recognise that when it comes to HNW individuals, no two cases are ever the same. The very structure of a financial portfolio is made more complicated by the number of variables that need to be considered by the lender, which can extend across international jurisdictions and asset classes. Conventional lenders more often than not, do not possess the capabilities, expertise or knowledge to deal with such cases.
Catering to the demand of HNWs, lenders who are well versed in addressing the financial circumstances of wealthy borrowers have become increasingly important. By applying their experience and specialist knowledge, the ability of such mortgage providers to understand the needs of HNWs means they are positioned to issue mortgages in a timely manner.
The UK finds itself in an interesting position. The lack of clarity surrounding Brexit has resulted in some lenders taking an ever-more risk-averse approach. And despite the rise of challenger banks and new fintech solutions, HNW individuals seeking mortgages for property acquisitions in the UK face being turned away for credit.
For this reason, it is vital that brokers and HNWs are aware of the mortgage providers who understand the needs of the wealthy and, in turn, are able to provide bespoke loans tailored to his or her nuanced circumstances.
Alpa Bhakta, CEO, Butterfield Mortgages Limited
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.