Blog Archives

Wealthy borrowers and the Mortgage Market Review

25.10.2012

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.

Adrian Anderson
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Adrian Anderson

The interest-only mortgage – in danger of becoming a niche product?

21.10.2012

With the Financial Services Authority set to publish its Mortgage Market Review this week, it is likely that banks will be forced to impose tighter controls on interest-only mortgages.

Yet, interest only is already turning into a niche product. It may still be possible to borrow on interest-only terms via the high-street banks but much trickier than in the past as lenders have radically tightened their criteria.

It means the majority of borrowers who borrowed on an interest-only basis, would probably no longer qualify. Most high-street banks would prefer not to offer interest-only terms, regarding it as too risky.

The place to go for interest only is the private banks, which makes it a niche product. While the private banks have various terms and conditions they all have one thing in common – they deal with wealthy clients. If you aren’t wealthy or on track to become wealthy at some point, you won’t qualify so in that sense they are niche.

Their reviewable five-year facilities mean a client’s interest-only strategy is revisited on a fairly regular basis so if it’s not on track, an element of amortization can be introduced. While this works well on a small scale, it would be tricky to introduce this level of scrutiny on a mass-market basis.

But maybe interest only should be niche. Critics argue that it is higher risk than a repayment mortgage because there is no ‘guarantee’ that the loan will be paid back at the end of the term. But if a client has a considered repayment strategy in place that they can comfortably meet, is it really any riskier? If the client has a remuneration structure which has a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or they will sell a property to pay off the capital, then I would argue that they should be able to borrow on an interest-only basis.

For example, if a client who relies heavily on bonuses for a significant proportion – perhaps the majority – of his income, can’t borrow against all of it, he will be severely penalised. A high-street lender may lend against no more than 50 per cent of the bonus, meaning a large and valid part of the borrower’s annual income would be ignored. If the client earns £100,000 basic and £200,000 bonus, he might be able to borrow four times income or £800,000, if all his base salary were taken into account and half his bonus. But there is an annual £100,000 that is not being considered.

In theory, this forgotten £100,000 per annum could enable him to pay off the mortgage in eight to ten years. What would be the point of a capital and interest mortgage over 25 years? Luckily for this client, he may qualify for private banking and therefore get his interest-only loan. Not everyone will be so lucky.

Jonathan Harris
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Jonathan Harris

Signs that Funding for Lending working as lenders cut rates

11.10.2012

Good news for borrowers everywhere – even those on higher loan-to-values (LTVs) – as several lenders have cut their mortgage rates this week, and others look set to follow suit. Swap rates – the rate lenders pay to borrow from each other – continue to fall to new lows as the Funding for Lending scheme starts to have an impact, with lenders able to borrow at rock-bottom rates.

Accord launched a ten-day sale earlier this week, including a five-year fix pegged at just 3.29 per cent for those with a 30 per cent deposit. HSBC has reduced its two, five and seven-year fixes by up to 20 basis points, while even one of the supermarkets has launched a five-year fix pegged at 3.19 per cent for those with a 40 per cent deposit. Nationwide has cut several fixes and trackers by up to 40bps, while Abbey for Intermediaries is cutting a number of two-year fixes by 10bps. ING Direct may be about to be swallowed up by Barclays but it is also cutting its rates this week on two and five-year fixes by up to 75bps.

The best rates are still available for those with the biggest deposits or similar levels of equity in their homes but the good news is that rates are falling on higher LTVs too, although you should still expect to pay a premium for the lender’s perceived added risk. What is less encouraging is the raising of Santander’s standard variable rate (SVR), which takes effect from this month and means that some borrowers are facing higher mortgage payments. Speak to an independent mortgage broker if you find yourself in this position to check whether you could remortgage to a more competitive deal.

The other ‘losers’ are those requiring interest-only loans with Nationwide no longer offering this option to new customers. However, while other lenders have tightened their interest-only offerings, the private banks remain committed to interest-only lending and nearly all of the deals we place with them are on this basis. Talk to us if you require interest only to find out what options are available to you.

Jonathan Harris
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Jonathan Harris

Interest-only mortgages fall further from grace as interest rates held

04.10.2012

There were no real surprises today when the Bank of England announced that interest rates would be held at 0.5 per cent for another month and that there would be no further quantitative easing (QE) – for now. It still looks likely that there will be more QE before the year is out, and even a cut in rates – if you believe some forecasters.

What is surprising is Nationwide’s announcement that it will no longer be lending to new borrowers on an interest-only basis. Existing borrowers on interest only who require further funds won’t be able to get them on an interest-only basis either. However, existing customers on interest only will be able to keep this arrangement going.

This decision is surprising in its severity. Yes, interest only is hardly popular among lenders now, with the majority severely pulling back from it, offering restricted loan-to-values and maximum loan sizes, while reducing the number of repayment vehicles that are deemed acceptable. But not offering it at all to any new customers, not just first-time buyers? That’s an extreme move. Interest only doesn’t suit everyone but as long as the borrower has a genuine repayment strategy in place, why is it an issue for lenders?

It might not be long before the only place you’ll find an interest-only mortgage is a private bank.

Advice is increasingly crucial, whether you have an interest-only mortgage or are on your lender’s standard variable rate (SVR). While interest rates may not have moved this month, Santander is hiking its SVR from 4.24 to 4.74 per cent regardless. This means higher monthly payments for thousands of mortgage borrowers. There might be an opportunity to remortgage if you have enough equity in your home, your earnings haven’t fallen over the past couple of years and you are not on interest only. If not, you may struggle.

Adrian Anderson
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Adrian Anderson