It may seem contradictory that the very wealthiest borrowers are the ones who struggle most to secure the best mortgage deals from mainstream lenders. Believe it or not, this has been a prevailing market trend over the past few years.
Amid concern lenders were issuing mortgages too freely, the Mortgage Market Review (MMR) – in part a response to the financial crisis – came into force in April 2014. Stricter checks were introduced to ensure any loans advanced were affordable, including stress tests to safeguard against a future interest rate rise. Where lenders used to use a simple income multiple, the new rules insist on in-depth affordability calculations taking account of all the borrower’s current and future outgoings.
This emphasis on ‘vanilla’ income structures and rigid, tick-box criteria posed a clear disadvantage to wealthier borrowers, who were at risk of being screened out despite being perfectly able to afford a mortgage. Affordability checks are now largely automated, leaving less room for bespoke decision-making.
For this reason, the MMR contained an important exemption. Under its terms, the affordability rules do not apply to high net worth (HNW) individuals, defined as those who earn more than £300,000 a year or have assets over £3m. Wealthier buyers should therefore in theory be able to borrow larger sums at higher loan-to-income ratios.
It is becoming increasingly apparent that mainstream lenders are failing to use the exemption. As the big high street banks are generally home to the most competitive deals in terms of fees and interest rates, this oversight means HNW borrowers are effectively barred from the best terms.
Why aren’t lenders using the exemption? Part of the problem lies in the structure of these larger institutions; they are geared towards volume business, and simply don’t have the resources to process applications on a case-by-case basis.
There is also a desire on the part of these lenders to avoid catching the watchful eye of the regulator. In an industry where regulatory attention rarely spells good news, lenders are keen to steer well clear of any kind of exception to the rules. Fear of getting on the regulator’s bad side is driving their reluctance to use the exemption, and many industry experts feel they are missing a golden opportunity to get some good business on their books.
“The conservative approach of high street lenders excludes borrowers who are perfectly creditworthy – and credible,” says Islay Robinson, CEO of Enness Private Clients. “It’s a shame they are choosing not to use the exemption. That said, there are still plenty of options out there for HNW borrowers – it has just become a trickier market to negotiate alone.”
Being locked out of the high street means wealthier borrowers are being forced to explore other avenues. Private banks are generally much more flexible, and take a sympathetic, holistic approach to complex income structures; on the flipside, some require borrowers to place their assets under management to balance their books.
Smaller, boutique lenders generally look at cases on an individual basis and use real people in place of automated affordability checks for their decision-making, but their lending is capped around the £1m mark, well short of the needs of HNWs.
Enness’s Million Pound Mortgage Guide is designed to help borrowers navigate the upper end of the mortgage market. It breaks down the challenges and opportunities of this space, and sets out a variety of options free from high street restrictions. Alternatively, if you would like more information on the high-street-versus-private-banks debate, please see our Difference Between the Banks Guide.
Whatever your needs, Enness’ smorgasbord of lenders means we are well-placed to source the best possible funding solution for you. Please do get in touch if you have any questions about this article, or simply want to chat through your options with one of our specialist advisers.