Recently two business partners came to me looking to acquire a mortgage at the same time as selling their business. After completion of the sale, they were to receive £5million each. They were going to use the profits from the sale to invest in land for development and residential property to generate future income.
Typically, a high street lender would not offer a mortgage to this type of client because they will no longer have an income to support the level of debt they are looking to acquire. High street lenders require payslips from an employed person, or up to 3 years of company accounts from a self-employed client to show consistent income to prove that they can support a mortgage. They would lend around 4-5 times a client’s provable income.
Therefore, it was necessary to approach a private bank. A private bank is able to take a holistic view of the client’s overall wealth. My clients did not already have a relationship with a private bank and also needed somewhere to put the funds from the sale of the business. They did not want to tie up all the proceeds from the sale into property.
I was able to arrange for the clients to meet with a bank to discuss investing a large amount of their sale proceeds into an investment portfolio. This would then earn a healthy return subject to the client’s risk appetite, giving the clients additional income.
The bank then agreed to lend the clients a Lombard Loan against their portfolio. A Lombard loan is a grant of credit to banks against pledged items. A rate of just 1% above the Bank of England base rate was agreed. This provided the clients with a rate of lending competitive with the high street and they could then use that loan to purchase land for development.
The lender arrangement fee was just 0.15% of the loan amount which is very attractive compared to a usual private bank lender fee of 1%. This is also much cheaper for the client than taking out commercial and development finance to fund the development project. Development finance can be expensive – 2% lender fee with an interest rate higher than 1% of the loan amount each month is standard.
The rate of interest from the investment portfolio is intended to beat the rate of interest on the Lombard loan.
One of my clients was looking to buy a residential property for her and her family to live in. For this property, she wanted to take out a mortgage on the residential property, not a Lombard loan.
As the client no longer has an income, the bank was able to monetise their portfolio using the Financial Conduct Authority (FCA) High Net Worth Exemption (proof that the client has over £3m net assets) to show that she could afford a mortgage of £1m. The bank could then lend at a rate of 2.6% 5-year fixed, on an interest-only basis.
With this criteria, they can offer an interest rate of 1% above the Bank of England base rate OR a 3 month LIBOR. This means that the client’s loan can be based on interest only, and the bank would not have to consider income and expenditure to secure the loan.