In theory the idea behind obtaining a high LTV on mortgage borrowings is simple. Maximise your income and utilise any assets you have for security. This reduces the risk for mortgage lenders, there is significant income available to pay down the mortgage while assets used as security act as an insurance policy in the event of financial distress. In practice, this process can be complex and while traditional high street banks are still competitive with vanilla high value residential mortgages, private banks and niche lenders are more flexible.
We will now take a look at the actual process of preparing and applying for a large/high value UK residential mortgage.
Role of a mortgage broker and how Enness can help
The role of a mortgage broker when looking at large/high value UK residential mortgages can literally be the difference between a refusal and a successful application. Many clients come to us having been turned down by other mortgage brokers or refused by mortgage lenders. It is worth remembering that mortgage lenders, especially private banks and niche lenders, are looking for business. How we present your mortgage application, and who we present it to, is as important as the actual affordability figures themselves.
- We work out your current situation and your plan
Traditional high street banks are severely restricted by the regulatory straitjacket which has tightened since 2008 after the US mortgage crisis. There is still a significant role for high street banks in the mortgage market but when looking at complex large/high value UK residential mortgages these tend to be the domain of private banks and niche lenders. Our first objective is to clarify your current financial situation and lay out a detailed plan which can be presented to our mortgage lender contacts.
When looking at your current situation will include:-
• Employment income
• Additional income streams
• Potential bonuses
• Future one-off payments
While high street banks will focus on regular employment income as a means of calculating affordability, private banks and niche lenders take a broader approach. We are often approached by clients who have complex finances which may include a number of mortgages, high interest debt such as credit cards with many asset rich but with limited short term cash flow. Sometimes when applying for mortgage funding there is the opportunity to reorganise assets, refinance debt and bring different elements of complex finances under the same umbrella.
- We collate the facts
The initial meetings/discussions with potential clients are often the most important as this is where we gather the facts regarding their finances, assets and plans for the future. Over the years we have seen many cases where clients have had additional assets to hand or future income streams which they have failed to consider with their mortgage applications. This may include any of the following:-
• Share in a family trust
• Stake in a family business
• Dividend payments
• Private pensions
• Bonus payments
• Sale proceeds from asset disposal
As we touched on above, the initial fact finding stage can also open up a variety of different options further down the line. This may include refinancing relatively high interest debt at a much reduced rate or simply using additional assets as security for a mortgage application.
- We present the facts to the correct lender in the correct way
As an independent mortgage broker we have access to more than 300 lenders with no restrictions as to who we can talk to. We have built long-term relationships with traditional high street banks, private banks and an array of niche lenders. As a consequence, we are able to create a competitive environment for our client mortgage applications to ensure we are able to negotiate the best rates and the best terms. However, presenting a mortgage application to the correct lender in the correct manner is also extremely important.
We are well aware that many mortgage lenders will specialise in particular sectors whether this is expat mortgages, self-employed mortgages or simply maximising mortgage borrowings. Our in depth knowledge of the market ensures that we are able to present all mortgage applications in their best light, to the correct lender in the correct way. When we talk about the correct way what do we mean?
Well, there are various issues to take into consideration such as:-
• Presenting all income streams, possibly across various currencies
• Highlighting global assets which can be used as security against a mortgage
• Recommending the most appropriate mortgage lending structure for the client’s situation
• Focusing on refinancing opportunities/exit routes where appropriate
• Highlighting the earnings potential of the customer going forward
It is vital that mortgage lenders are made aware of the potential of the individual in relation to their career, wealth and prospects going forward. Private banks and niche lenders are as keen to provide mortgage finance at competitive rates as they are to nurture long-term relationships. In many cases this may require the transfer of funds/investments to an asset management division.
- We work on the objective and subjective elements
We have secured numerous high LTV mortgages over the years many of which were in the millions of pounds. Taking account of the long-term objectives of a potential client and often undertaking creative thinking for the subjective elements can create unique mortgage funding opportunities. As a consequence we have managed to arrange financing for what can best be described as challenging scenarios. For example this case study perfectly illustrates our creative and flexible approach.
Client objective: UK national who was living in Monaco and looking to raise additional finance against Monaco apartment
Summary of scenario:
Property: Apartment in Monaco
Property value: €1.85 million
Existing mortgage: €400,000
Property equity: €1.45 million
Additional funds required: €200,000
Remortgage: €1.4 million
Type of mortgage: Interest only
Mortgage interest rate: 1.5% variable
Repayment of existing mortgage: €400,000
Additional funds for client: €200,000
Funds available for AUM arrangement: €800,000
In order to secure the best terms, and maximum borrowings, the client agreed to transfer €800,000 (from the remortgage) to the asset management division of the private bank mortgage lender. This released the required finance, created the appropriate security and the income from the assets under management agreement part/fully funded interest only mortgage payments. Creative thinking on behalf of Enness; refinancing the whole property, securing a very competitive rate and releasing the required capital created a win-win situation for the private bank and customer.
- We stretch the lenders criteria
When it comes to high street banks, many mortgage applicants become victims of very specific lending criteria from which some banks are afraid to deviate. Affordability is calculated on regular employment income with many banks unwilling and unable to take into account bonus payments, dividends and other income streams. Indeed some of our clients are asset rich with properties and business interests across the globe which could be used as security. However, while we have managed to stretch the criteria of some high street lenders, many will simply not budge.
The approach from private banks and niche lenders is very different. They are prepared to look at the overall picture including regular income, irregular income, UK assets, global assets set against the client’s financial situation. In many cases they will stretch their criteria to secure an agreement while still maintaining an appropriate level of security. In simple terms, the lending criteria for traditional high street banks is often set in stone while private banks/niche lenders have an extremely fluid and varied lending criteria. Rather than pigeonholing individual mortgage applications they treat each one on a case-by-case basis.
The fact that we are able to present mortgage applications in their best light, with the most appropriate lending structure and relevant security gives them confidence in our understanding of the market and the customer.
- Lenders work with us to secure maximum borrowings
Many property buyers with non-traditional finances often feel as though traditional high street banks are working against them rather than working with them. We have heard from many customers who believe that the starting point for many high street bank mortgage negotiations was one of refusal. There is no open mind, no looking at the bigger picture and it often felt as though they were fighting a losing battle. Compare and contrast this with our experience of private banks, niche lenders and to be fair some high street banks.
Our long-term relationship with many mortgage lenders not only allows us to recommend customers and suggest mortgage lending structures but they are also happy to assist us. Many of our lending partners will review our mortgage applications and actually advises how to maximise borrowings. This may mean using additional assets as security, maybe a total refinancing of the client’s debt or simple tweaking of the way in which the information is presented. This reflects how open they are to business compared to the high street banks which are continually reducing their risk profiles and turning their back on more complex mortgage applications.
Differences in maximum lending on same criteria
As we touched on above, it is as important to approach the most appropriate mortgage lender for a customer’s scenario as it is to present their finances in the best possible light. In practice, we have seen significant differences in maximum lending figures across different mortgage lenders on the same criteria.
- Salary multiple
The majority of high street banks will work on around four times an individual’s salary when considering a mortgage application. Where there is a joint application the salary multiple might be reduced to between 3 to 4 times. When looking at high net worth individual salary multiples, there is greater scope across private banks and niche lenders. We have seen the emergence of some mortgage deals on in excess of five times salary. There have been occasions where high street banks have been competitive in theory but very often there is a limit on the level of funding they can deliver.
When it comes to private banks and niche lenders they may consider a higher multiple for high net worth individuals. Taking into account employment prospects going forward, savings and investments, there is potentially greater scope to extend mortgage funding limits. There are no ballpark figures when it comes to salary multiples for high net worth individuals because very often there is so much more to consider. We have secured mortgage finance where the client had zero regular income!
- Bonus, commission and second employment income
You will start to see a pattern emerging in relation to mortgage funding when comparing high street banks, private banks and niche lenders. The theme of safety first is certainly prevalent with regards to the way high street banks treat bonus income, commission and second employment income. For example:-
- Bonus income
The majority of high street banks will only take into account a maximum of 60% of any bonus income. They will also likely request bonus payment details going back two years to ensure that payments are regular. On the whole, although there are some exceptions, high street banks will not recognise foreign income bonuses when calculating mortgage affordability. Traditional lenders also tend to cap bonus levels, such as in the following scenario:-
Basic salary: £50,000 per annum
Bonus figure: £150,000 per annum
The majority of high street lenders would cap the bonus figure at £50,000 when calculating affordability. This could have a significant impact upon the amount of mortgage funding available to a high net worth individual.
The criteria are very different when it comes to private banks and niche lenders who will often take into account 100% of any bonus payments. As well as looking backwards for evidence of regular bonus payments they will also consider the prospects for the future. In effect they are investing in the individual’s prospects for the future as much as their ability to cover mortgage payments today. While the restrictions on high street banks when calculating affordability can impact those on high bonuses and relatively low salaries, they are still competitive for those on relatively high salaries and relatively low bonuses.
While the vast majority of high street mortgage lenders will allow the applicant to submit commission payments as part of their affordability calculation, there are conditions. It will depend upon the individual lender but they may ask for evidence of previous commission payments so they can average out monthly income. It is also commonplace for commission receipts to be reduced by 50% when used in the affordability calculation. In a similar fashion to bonuses, some private banks and niche lenders will take into account 100% of commission payments when considering mortgage funding applications.
- Second employment income
The issue of second employment income has been a bone of contention for many mortgage applicants in years gone by. Unfortunately, the majority of high street lenders will at best reduce the figures when calculating affordability. More often than not, mortgage lenders on the high street will effectively ignore second employment income. The more flexible approach by private banks/niche investors can make a difference in this scenario and lead to significantly higher mortgage funding and LTV ratios.
If you sit back and consider second employment income, in many ways this is a strange strategy from high street banks. While on one hand you could argue that retaining two jobs at the same time is difficult/impossible in the longer term, does it not also reduce the risk of unemployment going forward?
- Employed vs Self-Employed
Before we look at the way in which employed and self-employed mortgage applicants are treated, it is worth reminding ourselves of the ultimate conundrum. When self-employed it is financially prudent to minimise profits to reduce tax although there is a necessity to maximise income when applying for mortgage finance. Trying to balance the two is challenging!
- Employed salary
When applying for any mortgage funding, full-time employment is by far and away the preferred option as income tends to be more reliable. There is also the perceived greater security of employment but this is not always the case. As we touched on above, those with a traditional financial situation could probably secure mortgage funding on around four times annual salary.
When it comes to private banks and niche lenders, the ability to take in the overall situation can lead to perceived higher salary multiple. In reality, this higher salary multiple is likely to be secured against other investments, assets under management or there may be other income set to flow in the future.
- Self-employed income
As we touched on above, self-employment is a situation where individuals are pulled in both directions. They need to legally minimise their profits to reduce taxes while increasing their income when applying for mortgage finance. As a consequence, many high street banks will simply take account of average income over a two or three-year period and use this as the basis for their mortgage affordability calculation.
The situation is very different with private banks and niche lenders who may consider:-
• Net profit over a period of years
• Net profit with salaries added back
• Salaries and dividends
• Directors loans (in some circumstances)
• Retained earnings
The majority of the above figures will relate to corporate entities which many high net worth individuals use to manage their self-employment income. In theory, the criteria are the same for those operating as sole traders. It is this ability and willingness to consider the wider picture as opposed to focus on pure simple net income which makes private banks/niche lenders more attractive for self-employed high net worth individuals. For reference, some mortgage lenders will consider an individual as self-employed if they have at least 15% equity in a company.
Loans, credit cards and the cost of bringing up a family
When high street banks look at the affordability calculation for high net worth individual mortgage applications they will also consider any significant outgoings. When it comes to loans, credit cards and even the cost of bringing up a young family, these can have a significant impact upon disposable income. The fact that high street banks do not normally consider the additional assets and savings of mortgage applicants has seen many people look towards private banks and niche lenders.
When we deal with private banks and niche lenders we present the applicants financial scenario in the best possible light. In some circumstances we have seen fairly simple mortgage enquiries grow into a fully-fledged restructuring of all finances. This may include raising additional capital to pay off high interest debt, such as loans and credit cards, or as we saw above, raising additional capital for assets under management arrangements to maximise mortgage funding. We have worked on some extremely complex financial situations while others have been relatively straightforward. Very often, the raising of mortgage capital will offer the opportunity to look at the wider picture and identify additional savings which could be made.
The benefits of interest only/repayment mortgages
It is fair to say that interest only mortgages were extremely commonplace prior to the 2008 US mortgage crisis. As a consequence of the resulting worldwide economic downturn, financial regulators around the world tightened the criteria for mortgage lenders. High street banks are now often reluctant to consider interest only mortgages and would prefer repayment mortgages where both capital and interest is paid on a monthly basis. That is not to say interest only mortgages are not available on the high street, but they are not as competitive as they used to be and are now in many ways the domain of private banks and niche lenders.
Interest only mortgages are extremely useful when it comes to those with fairly limited cash flow in the early days. The fact that the initial mortgage funding is not repaid until the end of the term can assist greatly when acquiring a property. When it comes to repayment mortgages, each monthly payment will be part capital and part interest. As a consequence, over time the interest charge will fall and at the end of the term both the capital and the interest will be fully repaid. Many mortgage applicants with a preference for interest only arrangements may need to refinance at the end of the term unless they have managed to save additional capital or have assets they can sell.
In brief, interest only mortgages assist with short-term cash flow but there is the small matter of capital repayment at the end of the term. Repayment mortgages require higher monthly payments but as the capital is reduced so the interest charge will fall month by month. The majority of mortgages today will also allow ad hoc capital payments and even early repayment of the mortgage in full. Due to the perceived risk associated with each type of mortgage, it can be easier to negotiate a lower headline interest rate on repayment mortgages compared to their interest only counterpart.
What is the maximum you can borrow as a percentage of the property?
While very little in the mortgage industry is set in stone, different types of lenders do tend to have their own maximum LTVs when it comes to mortgage funding. For example:-
- High street lenders
When it comes to larger mortgages, the vast majority of high street lenders will have limits in place with regards to maximum funding levels. Many high street lenders will cap their LTV rate at a maximum of 75% with some set at 70% and under. These tend to be for vanilla type mortgages where there is a fairly traditional financial situation and it is purely based upon income. In simple terms, the lower the LTV the low the headline interest rate
- Private banks
Private banks tend to be very different when it comes to an appreciation of LTV and an applicant’s overall income, wealth and assets. LTV ratios in the region of 75% plus are fairly common and we have had situations where we were able to secure LTV ratios of 100%. These are obviously fairly unique scenarios but they do reflect the difference between private banks and high street lenders.
However, it can be dangerous to compare private bank rates with high street lenders as you are not comparing like-for-like. Private banks tend to offer mortgages of a more bespoke nature while there is often no equivalent in the high street banking sector.
- Global banks
Many global banks will offer an array of mortgage services targeting expats and international investors. Some of the larger groups will have asset management divisions and offer services akin to private banking while others will offer more of a vanilla mortgage service. It is also worth taking into account local mortgage trends. For example, French banks are reluctant to offer interest only mortgages and it can be difficult for expats/international investors to secure financing. As an independent mortgage broker, here at Enness we have access to more than 300 international lenders. As a consequence, whether you are looking for a vanilla mortgage offer or perhaps looking to incorporate private banking with asset management, we have the contacts, skills and experience to find the perfect match.
- Bridging finance
There is a common misconception bridging finance is “the most expensive” type of finance. This may be so when comparing it to traditional long-term finance, but by very definition bridging finance is a short-term stopgap to secure a long-term objective (sale or refinancing). This type of finance will require a significant level of security and as a consequence we have seen LTV ratios of up to 100%. Again, this will depend upon the client’s individual standing although the fact it is very often linked to the sale/refinancing of an existing property itself offers a high degree of security.
Over the years we have seen some fairly complex and fairly challenging special situations when it comes to mortgage applications by high net worth individuals. Looking at scenarios from a different perspective, thinking outside the box and utilising our specialist contacts has seen us secure some of the most challenging mortgage funding you could think of. There are a number of scenarios which recur on a regular basis such as:
- Recently sold a business
We have arranged mortgages for high net worth individuals who are relatively cash rich after selling an asset/business. Many have a preference to maintain maximum cash flow/liquidity while also looking to secure a luxury home. Traditional banks are very often out of the picture because of their focus on regular cash flow which therefore leaves private banks and niche lenders.
In these scenarios we have seen many private banks/niche lenders offering very competitive mortgage rates on the basis that a certain level of funds will be transferred to their asset management divisions. In many ways this is a win-win situation. The mortgage lender has security often above and beyond the level of finance provided. The customer still has access to interest and capital appreciation on their assets under management which can go towards regular interest only/repayment mortgage payments. This is best described as a scenario where the individual is cash rich and looking to retain a high level of liquidity.
- Large asset base but low relative income
While each case will be considered on an individual basis, we have arranged a number of mortgages where the applicant has relatively low income but a large asset base. Again, this is traditionally the domain of private banks and niche lenders who do not have the same obsession with regular income that high street banks tend to have. In this situation, the use of assets as security against the mortgage can significantly increase the LTV ratio.
Indeed, we have had situations where the client has had minimal income, a significant asset base and we have on occasion secured 100% LTV mortgages. These are by no means the norm and more reflect our market experience and contacts in the mortgage funding sector.
- Complicated mortgage funding
The more complicated a client mortgage application the more reluctant many of our competitors are to get involved. Here at Enness the situation is very different because we have made a name for ourselves securing mortgage finance where others have walked away. From foreign nationals acquiring property in a different country, with income and assets around the world, to those with damaged credit ratings and more complications, we have on numerous occasions managed to find a mortgage lender willing to provide funds. We consider all mortgage enquiries on a case-by-case basis as do the mortgage lenders we deal with in the private banking/niche lending sectors.
Many retired high net worth individuals may be asset rich, cash rich but looking to retain liquidity going forward when acquiring a property. It is safe to say these are not necessarily the type of clients welcomed by high street banks. As a consequence, we have arranged a number of mortgage applications for retired individuals with great success. Private bank/niche lenders will take into account assets, savings and for example regular payments and one-off payments from private pensions. They may also use this as the basis of nurturing a more long-term relationship with the transfer of funds to an asset management arrangement.
In the past we have found that obtaining the correct paperwork and evidence of income can be challenging when overseas parties are looking to raise funds and acquire properties in the UK. Many countries do not have the same type of credit history information available as that in the UK, company accounting standards can vary and tax returns are sometimes non-existent. As a consequence it may take more time to gather evidence of assets and income. However, we have seen numerous occasions where the use of global assets and global income has opened doors to expat mortgages and the acquisition of overseas property.
- For inheritance tax planning
There are only two things certain in life, taxes and death! Therefore inheritance tax planning is vital for many high net worth individuals as the tax net continues to tighten. There are ways and means of mitigating tax liabilities, more tax advantageous ways of holding assets and of funding property purchases. The more successful inheritance tax planning will begin place many years before the death of an individual. We have experience in this area, regularly secure maximum mortgage funding and are able to create a bespoke funding structure around the individual circumstances.
We see many customers with the same type of financial scenario who approach mortgage applications in a very different manner. In our role as an independent mortgage broker we will initially instigate a fact-finding mission to clarify your financial situation, prospects going forward and plans for the immediate future. Our ability to present even the most complicated financial scenarios in the best light has seen us secure millions of pounds in funding for our customers.
In some cases you may see a relatively low LTV listed after an agreement with a private bank/niche lender. In many of these situations, traditional high street banks have turned their back and therefore comparing a relatively low LTV to the prospect of no funding is the real scenario. We know who to speak to, when to speak to them and the type of information they require to consider mortgage applications. We also know how to maximise income and assets when looking at affordability calculations.