UK Private Bank Lending Market

The term private bank is one which covers a multitude of different banking services with one thing in common. The services are predominantly targeted at high net worth individuals/ultra-high net worth individuals with the intention of building up a long-term relationship. The vast majority of private banks tend not to openly advertise/promote their services, instead working with mortgage brokers and finance companies on an introductory only basis.

Here at Enness we have strong long-term relationships with many private banks specialising in different areas of the lending market. As a consequence, due to our deep seated knowledge and the general flexibility of private banks we have been able to negotiate many bespoke mortgage arrangements over the years.

Different types of private banks

The private banking sector operates under very different regulations than traditional high street banks. As a consequence, private banks in general will be able to offer a greater degree of flexibility compared to their high street counterparts. Mortgage finance and loan agreements are often used as a means of attracting customers with the intention of creating a long-term relationship. This relationship could extend to an array of different services which include:

• Asset management
• General wealth management
• Tax planning
• Tailored lending/finance
• Investment opportunities
• Legal advice
• Review of investments
• Planning for retirement
• Managing international wealth/assets

The services offered by private banks are focused on high net worth individuals with a more personalised approach. For some private banks, this personalised approach with account managers can prove challenging when personnel move to other private banks. However, this is just part and parcel of the private banking industry and the type of relationships nurtured.

Why do private banks lend?

There are many reasons why private banks are active in the lending market. As they tend to offer bespoke finance often built upon a non-traditional/complex financial background, they can legitimately charge a premium on high-risk/complex funding requirements. We know that traditional high street banks are very tightly regulated with specific affordability calculations for mortgage finance as an example. The situation with private banks is different as they are more flexible, look at the wider picture and even look to offer initial attractive rates as a precursor to building up a long-term relationship.

One of the significant elements of a long-term relationship relates to assets under management (AUM) which is in many ways the Holy Grail of the private banking industry. Many of the bespoke arrangements we have negotiated have involved an element of AUM and seen clients transfer varying amounts of cash/assets to a private bank’s asset management division. There have also been occasions where we have managed to negotiate extremely attractive lending terms without the need for AUM arrangements with each application reviewed on a case-by-case basis.

What are main considerations?

Unlike traditional high street banks, which are effectively straitjacketed by regulations, private banks have a greater degree of flexibility. Where a high street bank may only recognise salaried income a private bank may also appreciate investment income, worldwide assets and different currency income streams. To all intents and purposes, private banks can look at the wider picture and also take into account potential earnings/income going forward – akin to an investment in the future of the individual. There are no hard and fast rules, every finance application will be considered on a case-by-case basis which opens up the potential for bespoke offerings.

While a willingness to look at the wider picture may inadvertently give the impression private banks are actively taking more risk, this is not the case. All applications will be considered bearing in mind income streams, assets and security going forward. As we touched on above, one of the main considerations is the transfer of a pre-agreed level of asset/cash to the asset management division of a private bank. A private bank will still crunch the numbers and work out profit margins like any other bank would but tend to take a longer-term view.

Why are private banks important to the market?

There is a temptation to suggest that private banks operate in areas where traditional banks are unwilling to tread. Even though private banks are more flexible, willing to consider the wider picture and build a long-term relationship, they also offer traditional forms of finance. That said, there is no doubt that the strength of the private banking sector is the ability to offer bespoke arrangements which are carefully sculptured around a client’s financial situation. The skill with which varying levels of security are also included in bespoke arrangements perfectly reflects the attention to detail.

On the whole, it is fair to say the private banking finance has filled a vacuum which was left in the aftermath of the 2008 US mortgage crisis. As high street banks around the world became more risk averse, with a need to strengthen their weakened balance sheets, and regulators introduced strict conditions on mortgage finance especially, this did initially impact liquidity. The nimble footed and flexible private banking sector was very quick to fill this vacuum as were other areas of the financial sector such as crowdfunding platforms.

This increase in lending market share is likely to continue for the foreseeable future as more complex financial scenarios amongst high net worth individuals effectively remove traditional banks from the equation. There is also the fact that global politics and investment have been extremely volatile in the last decade. In many ways this plays into the hands of the private banks where there is a heavy emphasis on research and information gathering. If new trends are emerging in the investment/money markets, or tax changes are on the horizon, private banks will be well aware of them before they hit the headlines.

Pre-planning relationships to get the best mortgage

There is a saying, to be forewarned is to be forearmed, which is extremely relevant when it comes to preplanning private banking relationships. The key to securing any bespoke mortgage finance via the private banking sector is to present the client’s finances in the best possible light. This may involve rearranging assets, refinancing debt and bringing more structure into a client’s financial affairs.

As we touched on above, the vast majority of private banks tend to depend upon mortgage brokers and financial companies for client introductions. As a consequence, here at Enness we know which private banks to approach for different types of finance, the information they require and the best way to present it. In many cases the trust factor built up between mortgage brokers and private banks is often enough to secure finance. Those introducing new clients to private banks act as a filter system, ensuring that only appropriate applications are presented to trusted lenders.

Importance of AUM

For many private banks AUM (assets under management) is the ultimate measure of their overall success and an integral source of funding. Retention of AUM clients on a long-term basis will eventually open up the opportunity to introduce other services from within the same private bank. In more basic terms, as investment management fees are based upon funds under management, the higher the level of AUM the greater the fee income for a private bank. However, there are also significant benefits to clients.

Over the years we have created many bespoke mortgage finance packages with private banking institutions. A number of these have revolved around AUM arrangements where the income/capital gains can go a long way towards funding client mortgage interest payments. Indeed with interest rates at historic lows, 0% in the Eurozone and 0.75% in the UK, the current environment offers a perfect opportunity to refinance high interest debt. The opportunity to bring all assets under one investment management roof so to speak, especially those with a proven track record, is a very powerful attraction for many high net worth individuals.

Due to the flexible nature of private bank funding there are no figures set in stone with regards to the level of AUM required. In unique circumstances we have been able to remove the AUM requirement which is often replaced by additional security using other assets. Some private banks will require at least one year’s interest as an initial AUM investment while others may ask for significantly higher levels depending upon the client’s financial status. In essence, AUM is used as a form of insurance policy which creates a safety buffer in the event that the client experiences financial difficulties in the future.

Case studies

Over the years we have arranged mortgage finance through private banks for many clients with complex financial footprints. Many of these footprints spread right across the globe with assets and income streams in multiple currencies. There is also the issue of different accounting standards across the world which can make it difficult to provide definitive proof of income.

Some of the more complex funding applications we have received and secured include:

UK national based in Dubai looking to buy second UK property

UK national based in Dubai looking to buy second UK property

Client requirements:

• Second mortgage to part finance future family home valued at £1.8 million
• Remortgage of £1 million buy to let property in London to raise funds

Challenges:

• Living in Dubai there is no requirement to provide accounts and income information
• No proof of income significantly reduced the pool of potential lenders

Solution:

As the client was involved in a very successful family business we were able to use our private banking contacts to begin negotiations. The lender took a pragmatic approach to the client’s income situation, overall wealth and connections to the successful family business. As a consequence we were able to arrange the following funding:

• 60% LTV on the new property investment
• 75% LTV on refinancing of the London buy to let property
• Interest rate of 3.09% fixed for two years over a five-year term

Case study link: https://enness.co.uk/case-study/1-8million-uk-property-purchase-for-british-client-based-in-dubai/

Securing a 100% loan to value mortgage on an €8.75 million St Tropez property

Securing a 100% loan to value mortgage on an €8.75 million St Tropez property

Client requirements:

• 100% LTV mortgage on an €8.75 million property
• Interest only mortgage

Challenges:

• An irregular income structure paid in multiple currencies

Solution:

When a client has an irregular income structure this can prove challenging and when it is paid in multiple currencies the process becomes more complicated. However, using our private banking contacts we were able to negotiate the following solution:

• 100% LTV mortgage on €8.75 property purchase
• AUM arrangement of initial €5 million investment
• Of the €5 million investment, €3.5 million was secured for the duration of the mortgage
• Fixed rate of 1.58% over five years
• Mortgage interest paid quarterly to accommodate client’s irregular income structure

Case study link: https://enness.co.uk/case-study/100-loan-to-value-on-8-75million-st-tropez-property/

American national living in the UK looking to acquire a £3.675 million property

American national living in the UK looking to acquire a £3.675 million property

Client requirements:

• 75% LTV mortgage
• Interest only

Challenges:

• Employment income was sufficient to support a maximum £1 million mortgage

Solution:

In this situation it was clear that we would have to be creative and utilise the full assets and investments of the client. Using our private banking contacts we were able to create a scenario where both the client’s employment income and investment portfolio income were used in the affordability calculation. As a consequence we secured the following funding:

• 75% LTV mortgage (£3 million max)
• Interest only mortgage
• Fixed rate of 2.39% over five years

Case study link: https://enness.co.uk/case-study/american-client-investment-portfolio/

Conclusion

The private banking sector has grown significantly since the 2008 US mortgage crisis which led to one of the world’s worst economic downturns. As traditional banks took a back step and reduced their risk profile this left a funding vacuum which private banks were more than willing to fill. While private banks are more flexible and consider the wider picture this is not to be confused with excessive risk. Assets under management (AUM) agreements offer the perfect chance to expand the long-term relationship between the private bank and client. They also ensure there is a degree of security in the event that a client experiences financial difficulties going forward.

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