Response to Mortgage Market Review HNW Proposals

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Enness, the large mortgage and high net worth (HNW) specialist, has formally responded to the latest FSA Mortgage Market Review paper, CP11-31, outlining its views on the HNW proposals contained within it.

The paper, published last December, suggested a more tailored and alternative approach for HNW borrowers because of the complex nature of income and the short terms of most loans. It offered a number of proposals including:
• Suggesting the FSA could either disapply the mortgage rules to HNW borrowers or allow them to forego the protection of the mortgage rules.
• Defining what constitutes a HNW customer – it suggested a gross income of no less than £1m pa or net assets of no less than £3m.

In its submission to the FSA, Enness is fully supportive of the approach of the Mortgage Market Review which places HNW borrowers outside the normal rules and regime. Enness suggest the paper ‘is excellent in its understanding of the HNW market and the more complex challenges it presents’.

Enness is supportive of disapplying the mortgage rules to HNW borrowers however believe there still need to be guidelines in place. This would make customers more comfortable rather than a situation where the rules were removed completely.

In defining what a HNW individual is for mortgage purposes, Enness has suggested gross income of £500k-plus pa and an asset base of £3m (excluding the main residence) or £5m if the main residence is included.

In addition Enness also propose that individuals who work in certain financial sectors and hold specific qualifications, such as an ACA qualification for example, also be exempt from the rules as they will have the financial knowledge to make an informed decision.

Hugh Wade-Jones, Director of Enness Private Clients, commented:

“We are on record as calling the proposals ‘balanced and coherent’ however there are a few areas where we believe greater clarity is needed, in particular around what constitutes the definition of a high net worth borrower. We believe £1m income pa is too high and clients earning this level of money is uncommon. Plus the employed tend to be heavily bonus-led which increasingly includes stock and other incentive schemes – it needs to be made clear whether this would be included as income. There also needs to be a greater understanding around the asset figure and whether this includes a main residence. Many individuals will have benefited from significant house price growth over the past 20 or so years and find themselves living in million pound-plus homes. Yet, they would never be deemed to be HNW and should not be treated as such; we need to know if, as many private banks already do, this net asset figure excludes the main residence.

“One further area we feel also needs to be addressed is the area surrounding funds being placed on account to give more security with regards to affordability. Many HNW individuals, especially older customers, will have large overall wealth but limited yearly income so banks will often ask that a number of years’ mortgage payments are made upfront and placed on account. It is certainly worth exploring this area and addressing how banks will judge funds on account versus yearly income when it comes to mortgage affordability. Our view is that money in the bank, so to speak, is far better security than income that may, or may not, be earned in the future.

“All in all, we are pleased the FSA is recognising HNW as a distinct sector from the mainstream and believe, for the most part, the proposals are sound and well thought out. We look forward to engaging with the FSA to ensure the HNW sector has a sensible regulatory framework to work within.”

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