HNW Individuals’ Mortgage Headache Caused By Complexity

After a study by Investec showed that high net worth individuals find obtaining a mortgage difficult, we delve into details about why this problem exists. 

A recent study by Investec found that 90
per cent of high net worth individuals have had
rejections for mortgage applications. As a result, they
have had to accept lower loan-to-value (LTV) ratios than
they wanted. Lenders were not able to understand their complex
incomes.

The most common problem was non-standard income – such as
receiving a large part of their pay in bonuses, another form of
discretionary income or being paid in foreign currency – which
prevented them from accessing higher LTVs. On average, they had
to accept LTV reductions of 20 per cent, the research shows.

On top of this complexity, interest rates have risen to the
highest level since before the 2008 crash, upending assumptions
about the pricing of loans, and risks. 

“In some ways the lending markets still haven’t
fully recovered from the impact the pandemic had on lender risk
appetites and their criteria,” Edward Riordan, manager, mortgage
advice service at Close
Brothers Asset Management, told WealthBriefing.

“Pre-pandemic, there was scope to apply flexibility to certain
areas of lender criteria, which is often required
for HNW individuals, given their unique circumstances.
These areas include those who may have large variable income from
multiple sources, overseas income, or a recent change in
employment status,” Riordan said. “We are still finding, in many
cases, that the lenders that were once flexible, are
just not willing to take a view anymore. The volatile interest
environment seen over recent times, hasn’t helped the situation,
but it is hoped that as rates begin to fall and
the market settles a little, some more flexibility may
return.” 

“What the last few years has done is place a much greater
emphasis on HNW individuals to seek appropriate
advice and assistance from an experienced and well-connected
mortgage professional. All hope is not lost, as with a deeper
understanding of the client’s circumstances, there are still
potential avenues to be explored,” Riordan added.

Appetite for lending has been hit by the tightening of credit
over the past two years.

“As in previous cycles of liquidity tightening, there is often a
decline in the number lenders willing
to lend to ‘non-standard’ borrowers – such as
non-domiciles, entrepreneurs, and corporate executives,” Iain
Mcleod, head of private client consultancy at St James’s
Place, added. “Sometimes, the simplest option for the
lender is to reduce the LTV on offer until conditions
improve, as occurred during the global financial crisis and its
aftermath.”

“Whilst indications are that credit conditions are beginning to
improve in the UK, there is a mis-match in lending
expections for HNW individuals in particular,” McLeod continued.

“A recent trend which may have fuelled this position has been the
rise in non-standard incomes – for example, tech companies who
need to reinvest heavily in their businesses but need to
generously remunerate key individuals through stock options,
restricted stock units (RSUs) and other forms of equity
compensation. Similarly, entrepreneurs may draw minimum salaries
but extract value from their business in other ways, particularly
during a more challenging economic backdrop,” he added.

“Similarly, non-domiciles have often sought the largest possible
LTV against their UK properties – as this is favourable to them
from an IHT perspective. However, due to the operation of the
remittance rules, these mortgages could not be secured
against foreign assets, requiring more flexibility from
their lenders,” Mcleod said. (These comments came at a time
when the status of non-doms in the UK has been under threat. Last
week the UK Chancellor of the Exchequer, Jeremy Hunt, announced
that the government would
end the non-dom system, further complicating the picture.)

“The recent period of ultra-low interest rates and quantitative
easing fundamentally altered the relationship
between HNW borrowers and their liquidity. Lower
interest rates meant there was little incentive to hold cash for
immediate liquidity, especially with favourable credit conditions
and accommodative lenders,” McLeod added. “This
position is now somewhat reversed. It is important
for HNW individuals to consider their overall liquidity
needs and ensure that this is factored into their long-term
financial planning, ensuring current conditions and borrowing
decisions do not risk impairing their longer-term financial
security.” 

“Such findings suggest that just because a person has a large
amount of wealth does not necessarily mean they don’t struggle
for credit, particularly if assets are complex, illiqiuid or tied
up in various ways. A number of specialists work in HNW mortgage
lending in the UK, a topic explored here,” Mcleod said. See

here for more details about the Investec report. 

The field of HNW lending is a specialist one. A number of
organisations work in HNW mortgage lending in the UK, a topic
explored
here.

The changes in credit market conditions have had other effects,
such as a major inflow into money market funds in the US,
although that seems to be less pronounced in Europe. (See

this report.)