In our latest guest post, Melanie Bien tells us why wealthy borrowers are looking to private banks for a mortgage.
With interest rates at historic lows for the past three and a half years, if ever there was a time to borrow, this is it.
It is a fallacy that wealthy people don’t need a mortgage. Even if you were in a position to buy a £2 million-plus property in London with cash, why would you want to? With interest rates at historic lows for the past three and a half years, if ever there was a time to borrow, this is it.
Photo Credit: Patrick Wang/ Shutterstock
Gearing enables your budget to stretch further, enabling you to buy a bigger property. Many buyers from overseas also prefer to gear up rather than transfer money from abroad, with its associated currency risks and costs. It doesn’t make sense to bring all this money into the UK, particularly if you may not be settling permanently and intend to return home at some point.
There are also tax considerations. Since the April Budget, an increasing number of high-net-worth buyers are purchasing property in their own name to avoid buying through a structure and paying 15 per cent stamp duty. But whereas they may have bought in cash via a structure, tax advisers are suggesting that they gear up as much as possible to make the purchase tax-efficient, particularly to mitigate inheritance tax.
High-street lenders have reined back on the volume of lending they are prepared to do.
However, while there are strong arguments for borrowing, since the downturn it has become notoriously difficult. High-street lenders have reined back on the volume of lending they are prepared to do. They have reduced maximum loan-to-values, cut back on interest only, and in many cases will no longer lend more than £500,000. Anyone buying luxury residential property in London is unlikely to find the answer on the high street.
And yet, there are still funding options available. Notably the private banks are the answer for most wealthy borrowers earning at least £250,000 a year who wish to borrow £1m or more. Although private banks have tightened their requirements regarding assets under management (AUM) in the past year and some require borrowers to pledge at least 20 per cent of the mortgage amount in assets with their investment team, (criteria are different from bank to bank and depending on the specific client, with some banks not requiring any AUM) they haven’t really reduced the amount of lending they are prepared to do and have seized the opportunity to pick up quality business, which is not being well served elsewhere. Old-fashioned underwriting, bespoke products tailored to the individual and a quick and efficient delivery to meet tight deadlines, make the private banks the perfect choice for many wealthy individuals.
As well as the better-known large private banks such as Coutts, there are many small, niche, family-owned private banks that are relatively unknown so accessing them can be tricky. Even if you already have a banking relationship with a private bank it might not be the right choice for funding a home purchase. It is therefore essential to use a specialist independent broker who understands this market and has excellent contacts at the private banks. They will know which bank is best suited to your circumstances and help you negotiate terms.
There are no ‘best buy’ tables of published mortgage rates for the private banks; indeed, some, such as Handlesbanken don’t even have set criteria. Some, such as Coutts and Barclays Wealth, do have published tables available on their websites but the rest tailor rates and fees to the individual.
Much will depend on how much they want you as a customer: the desirable will find that they can access some of the most competitive rates on the market. For example, it is possible to borrow up to £1.5m at 2.95 per cent for five years if you have a 40 per cent deposit. If you prefer the flexibility of a variable rate, up to £3m can be borrowed on a tracker pegged at 1.99 per cent above Bank Base Rate for five years, giving a pay rate of 2.49 per cent. For those requiring loans of £10m-plus, rates are available from 1.6 per cent above overnight Libor (the London Interbank Offered Rate), giving a pay rate of around 2.12 per cent. Fees are negotiated on a case-by-case basis.
As you can see, the private banks aren’t necessarily more expensive than their high-street equivalents. They will offer the cheapest terms because they wish to develop a relationship with the borrower, which also involves investing. It is worth noting that the private banks have tightened their requirements regarding assets under management (AUM) in the past year. AUM requirements differ from lender to lender: some require borrowers to pledge at least 20 per cent of the mortgage amount in assets with their investment team although criteria are different from bank to bank, with some not requiring any AUM, so don’t necessarily let this put you off.
A key advantage of Private Banks is that they understand complicated income streams.
One of the big advantages of private banks is that they understand complicated income streams, such as bonuses, performance-related pay, retained profits in a business and offshore income. Unlike mainstream lenders they are often willing to lend on an interest-only basis, which is a better choice in case of less conventional deals.
As far as the next 12 to 18 months is concerned, the high-street banks are unlikely to significantly ease their criteria, particularly when it comes to interest-only borrowing; indeed, it is possible they will become even stricter, withdrawing facilities or refusing to renegotiate them. As far as the private banks are concerned, their appetite for lending, margins, LTVs and fees, is unlikely to change.
Melanie Bien is director and founder of Bien Media, a PR consultancy specialising in mortgages and property. Formerly a journalist for ten years, she has worked for several national newspapers including The Times and the Independent on Sunday. She is the author of four books on property, including Renting Out Your Property For Dummies and is one of the 25 most influential people in the British property industry, according to the Daily Telegraph.
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