By Alpa Bhakta, CEO, Butterfield Mortgages Limited
Within the mortgage industry it is widely known that high-net worth individuals (HNWIs) often make for complicated clients. This might seem strange to some. After all, one may assume that the super rich would be a very straight forward group to provide mortgages to. However, the reality is quite different, and the challenges within this specialist market have become accentuated over recent years.
Since the onset of the global financial crisis in 2008, there has been a broad shift in the mortgage market, with lenders becoming much stricter in assessing applications in an effort to mitigate against the risk of defaults. Generally speaking, it is has been a positive and necessary development. But it has also been a great source of frustration for many HNWIs, who are now particularly susceptible to being turned away by lenders who are unable to process their more complicated financial profiles.
Research commissioned by Butterfield Mortgages Limited (BML) at the start of 2019 showed that one in nine (12%) HNWIs have been turned down for a mortgage in the past decade. This is because the measures high street lenders take to assess an individual’s finances are sufficiently prescriptive as to advantage those with straightforward finances. In other words, applicants who lack a regular income, are often perceived to be high-risk by lenders.
Wealthy individuals typically fall into this category––they rarely have a regular or structured form of income. Indeed at BML, we generally abide by the maxim “the wealthier an individual, the more complicated their finances” because it is common for a HNWI’s portfolio to be split across many different asset classes and jurisdictions.
It might seem strange but individuals who maintain a significant portion of their wealth in the form of both traditional and alternative investments––including assets such as art, classic cars and international real estate––might actually struggle to meet the stringent requirements that high street lenders insist upon.
Furthermore,this broader change in culture has been underpinned by structured regulatory changes. The most significant change in the legislation governing the UK mortgage industry comes in the form of the 2014 Mortgage Market Review, which requires lenders to implement a more rigorous financial stress test to ensure prospective borrowers have sufficient and reliable income to repay any loan.
As a result, HNWIs are at greater risk of being denied a mortgage because they fail to meet the criteria many lenders are following. HNWIs themselves are certainly conscious of the way these changes negatively impact them; 79% think too many banks apply tick-box methods when assessing mortgage applications, failing to adequately account for personal circumstances.
Navigating the property markets
The widespread adoption of this tick-box approach isn’t simply a source of frustration for propespective real estate buyers; property markets cannot run optimally when buyers and investors are unable to access the finance they need to make new acquisitions.
Many HNWIs, particularly those who derive much of their wealth from property investment, have found themselves limited by the changes as lenders have been circumspect with regard to mortgages for non-primary residential property. BML’s aforementioned study showed that 60% of HNWs believe it has become increasingly difficult to secure mortgages for non-primary residential purchases.
In essence, wealthy property investors depend for their dynamism on the ability to borrow against the strength of their existing portfolio. However, according to BML’s survey, 44% of HNWIs claim that their difficulty in securing a mortgage stems from the fact their capital is tied up in existing real estate investments, with two thirds (67%) feeling high street banks adequately cater to the needs of buy-to-let investors generally.
What can you do?
Property Investors and HNWIs need to understand that their finances do not conform to the expectations of most UK mortgage providers. As such, they represent specialist borrowers who, consequently, require specialist lenders.
For those lenders who are not well-versed in the intricacies that mark out HNWIs, a lack of a regular income will seem like a red flag rather than a reflection of the individual’s true wealth. Therefore, HNWIs looking to secure a mortgage are typically better served by seeking out a financial provider who will take a more holistic approach to assessing their finances; a task that requires skill, experience and time.
Ultimately, the shift towards a more risk-averse lending industry will help instill stability and trust into the UK mortgage market in the long-term.However, in the short-term, HNWIs must identify the mortgage providers who are well-placed to adapt their services to their particular needs, and in doing so offer the support required so he or she can proceed with a property purchase.