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Mortgage Market Review: what it means for high-net-worth borrowers

19.12.2011

Today sees the publication of the long-awaited Mortgage Market Review (MMR) from the Financial Services Authority. The proposals, which are now subject to further consultation, are designed to prevent a return to some of the irresponsible lending seen before the credit crunch.

There is much in the news about the general impact these proposals may have on the mortgage and property markets. But what about high-net-worth (HNW) and wealthy borrowers who make up the bulk of our clientele? We thought it important to blog about the specific impact the MMR is likely to have on this group.

The self-employed will be affected by the proposal that income must be verified for every mortgage application. Indeed, self-certification loans – where the borrower stated their own income – have already vanished. But just because you must now prove your income doesn’t necessarily make it impossible to get funding. Lenders have different requirements on this, asking for accounts over various periods of time, as well as taking other factors into consideration. We know which lenders are most sympathetic to the self-employed so don’t assume it will be impossible to get funding. Check with us first.

It’s not just the self-employed who may have a problem proving income. If you are one of the many people who have a complicated income stream, perhaps made up of bonuses, retained profits in a business, performance-related pay or offshore income, your average high-street lender will struggle to understand it. This could severely restrict the amount you are able to borrow. But all is not lost because the private banks really come into their own here as they are prepared to look at the bigger picture and better understand the needs of wealthier borrowers.

The clampdown on interest-only borrowing could have a big impact. Under the proposals, all borrowers will have to provide evidence of how the capital will be repaid. Anyone who has tried to take out a mortgage recently via a high-street lender will know this is already happening, with restrictions on loan-to-values and acceptable repayment vehicles. The FSA really has first-time buyers in mind who may in the past have opted for interest-only in order to stretch their affordability but many more borrowers will be caught in this net. However, private banks can be particularly helpful as they better understand interest-only borrowing than high-street lenders and will consider an inheritance or the sale of the property as a legitimate alternative to an investment such as an ISA.

All really is not lost, particularly as the FSA admits that wealthy borrowers – those earning £1m a year or with net assets of £3m – may be treated differently from those with more modest incomes and assets: ‘there is an argument that above some level of income and wealth… it is perfectly reasonable for a consumer to take greater risks and that regulation is not needed to protect those consumers from the decisions they have made.’

This may explain why the FSA proposes that those using a mortgage to consolidate their debts should seek compulsory advice, while wealthy borrowers should not have to. Here we beg to differ: everyone should seek advice when taking out funding to ensure they are getting the right deal for them. There are so many specialist lenders and private banks you may not even have heard of which may just provide the right funding solution for you.

Why miss out? Your mortgage is too big a financial commitment to take chances on, no matter how wealthy you may be.

Jonathan Harris
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Jonathan Harris

Anderson Harris launches

07.12.2011

‘Why launch a property finance business in such a dismal economic climate? Are you mad?’ are questions we are asked again and again. But for Jonathan and myself, setting up our own multi-disciplined property finance business exclusively targeting the £1m-plus funding markets was an obvious thing to do.

We’ve both focused on arranging finance for high-net-worth individuals for some years and although the economy is fragile, the high-end mortgage market continues to thrive. Many mainstream lenders are simply not interested in offering large loans, or when they do, insist on numerous restrictions. But the private banks and specialist lenders, who we work closely with, continue to maintain an appetite to lend.

Meanwhile, Prime Central London operates as a separate property market to the rest of the UK with London property prices rising this year while values in other parts of the country have fallen.

It is a fallacy that wealthy buyers do not require mortgage finance; they frequently do. Some borrowers 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/tax planning and to mitigate currency risk. We can help in all these scenarios, advising our clients to ensure they get competitive borrowing terms.

Contrary to what many think about the current economic climate, we believe there isn’t a better time to launch a property finance business. It will be a challenge but one we are looking forward to. Contact us if we can be of any assistance to you with your funding requirements.

Adrian Anderson
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Adrian Anderson

Why long-term fixed-rate mortgages aren’t the answer

Should we all be opting for 30-year fixed-rate mortgages? Housing minister Grant Shapps thinks so, as he becomes the latest politician to call for lenders to offer longer fixed-rate deals.

But are borrowers interested? Research from the Council of Mortgage Lenders suggests not, with 1.8m borrowers coming to the end of a fixed-rate deal moving onto their lender’s standard variable rate (SVR), rather than choosing another fix. More than half of these borrowers have more than 10 per cent equity in their homes so could remortgage if they wanted but are waiting to see what happens with interest rates.

While politicians argue that longer-term fixes give stability to borrowers and the housing market, when borrowers do opt for fixes, they tend to prefer two, three or five year deals. Fix for longer – and need to move for whatever reason – and you incur a hefty early repayment charge.

For borrowers on one of the cheapest SVRs, staying put can make a lot of sense. But it depends on your lender: while some borrowers enjoy SVRs of 2.5 per cent, those with some of the smaller building societies could be paying more than 6 per cent. If the latter is the case, you are likely to be better off remortgaging onto a fixed rate.

Much depends on what you think will happen with interest rates and whether you need the certainty of a fix. Although interest rates have been held at 0.5 per cent for two and a half years, and inflation is at 5 per cent – well above the government’s 2 per cent target – it is unlikely that interest rates will rise anytime soon. Some economists believe they won’t start rising for a couple of years, and that once they do, it will happen slowly, because of the fragility of the economy.

It is also worth bearing in mind that while fixed rates are at all-time lows, they won’t stay there forever. Barclays recently increased its fixed rates on the back of the increased cost of funding, while Bank of Scotland raised its SVR for the same reason so borrowers need to be vigilant.

Whatever your situation, whether you are coming up to remortgage or buying a property, it is vital to seek independent advice to ensure you don’t pay more than you need to, particularly if you are looking for funding of more than £1m. While the high-street lenders continue to regard complicated income streams and interest-only requests with suspicion, the private banks are comfortable in this space for the right client. Rates continue to be competitive when viewed alongside the mainstream offerings although if you really want a 30-year fix you are likely to be disappointed.

Jonathan Harris
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Jonathan Harris