Mortgage Market Review for The Wealthy

After months of consultation, the Mortgage Market Review (MMR) is finally published, including certain welcome exemptions for wealthy borrowers. The Financial Services Authority (FSA) recognises that high-net-worth borrowers have different demands of lenders than the less wealthy. They tend to have more complex incomes and short-term lending facilities of five years or so, which are typically offered by the private banks. 

With wealthy clients, there is no need to drill down into the details of basic expenditure such as utility bills and council tax, for example, while they are often asset-rich so mortgage payments could be serviced through these assets, including the sale of the property. In an earlier consultation, the FSA proposed defining a HNW customer as having a minimum net annual income of £1m or minimum net assets of £3m, but the minimum income requirement was reduced to £300,000 in the final version of the rules. This is a sensible revision, as £1m is much too high and would exclude many people that most of us would normally describe as 'wealthy'. 

The MMR recognises that the wealthy have a 'considerably reduced risk of becoming homeless' if they get into financial difficulties because they have other assets that they can call upon. This is a common-sense approach. It also appreciates that the private banks keep up a good dialogue with their clients because they are providing a bespoke service, so the client's situation is continually reviewed, at the very least on an annual basis. While HNW mortgage customers will be able to get a mortgage on an execution-only basis, we still think it is essential that advice is sought from an independent mortgage broker who specialises in arranging funding for wealthy clients. 

Because the structure of the deal and interest rate tend to vary depending on the client, advice is crucial in ensuring that it is the right product. Having someone who understands the market negotiate with the lender on the client’s behalf can make a crucial difference.

By Adrian Anderson

Mark Zuckerberg's mortgage

It is a fallacy that wealthy people don’t need mortgages. If billionaire Mark Zuckerberg sees the need for a $5.95m mortgage on his home in Palo Alto, California, according to reports from Bloomberg, you can bet that those worth much less than his $15.7bn could also benefit.

Bloomberg reports that Zuckerberg has a ’30-year adjustable rate loan starting at 1.05 per cent’. It is likely that he has chosen a variable-rate deal, linked to Libor (the London Interbank Offered Rate) because the Federal Reserve has suggested that rates will be kept near zero for the next couple of years at least. Presumably he can also cope with fluctuations in his monthly mortgage payments, which is why he didn’t opt for a restrictive 30-year fixed rate instead.

The most interesting part is that he has a mortgage at all. But really, it makes perfect sense. If you can borrow money at such cheap rates, you can invest ‘spare’ cash you have where it will generate better returns. In this way, the wealthy can use other people’s money to make more money, which will make them wealthier still.

The other advantage the wealthy have is that they can get more favourable terms than the rest of us. Far from offering higher rates and charging bigger fees than high-street lenders, private banks often offer much better terms because they wish to attract the wealthiest borrowers. Lending is almost secondary; it is all about the client and their appetite to do other business, either at the present time or in the future.

The private banks understand that if they get someone through the door via their lending services, their wealth management side should be able to help with their investments. And for many private banks, this side of the business is far more lucrative than lending.

Some of our wealthy clients need to raise finance because they are not in a position to purchase solely with cash, while others choose to borrow against their property to assist with financial planning and to mitigate currency/tax risk.

Private banks don’t have a high-street presence so it is virtually impossible to access this finance without using a specialist broker. Banks’ lending criteria vary considerably so a bank that is suitable for one client may not be ideal for another. The broker who really understands the private banks will know not only the bank most suitable for the client but also the right banker to contact within that bank so they can access the right point of entry.

BY J HARRIS