Property Finance Options - 2. £1m+ Mortgages (and the hidden struggle)
As discussed last week I was going to write a number of articles regarding the different ways of borrowing funds and this week I feel it seems right to write about the struggles that people face when trying to borrow more than a million.
At this level people would assume it was straight forward and easy for a high net worth client to go to their bank and borrow any amount of funds needed for whatever reason they require this for. Contrary to belief this is not actually the case and in most cases banks will even have higher interest rates for lenders looking to borrow over £1m. First of all lets look at the reasons this can occur and first of all as always it comes down to the risk posed to the bank. First of all clients earning the type of funds required to borrow this much money are generally at the higher risk of the employment world. This goes from high earning corporate executives all the way to footballers. For example a footballer may look like a safe bet to lend to on the face of it e.g. earning 40k a week (2,080,000 per year) and wants to buy a property valued at £4m and borrow £3m. Very simple this is only 1.5x income, but then you look in to this further. This footballer is only on a 4 year contract and there is no guarantee after this contract. This means the lending will have to be based over a 4 year term. This then makes the payment £65,000 a month, which the bank has calculated there stress test minus any current debts the footballer has (car finances more than likely) this mortgage more than likely becomes unaffordable. The bank may also require the footballer to put an injury insurance in place encase he gets a career ending injury. This is very similar throughout a number of professions earning similar funds. Another risk to the bank is then if this loan goes in to default, this is a large percentage of there debt book that they then have in default which means they may not be able to lend money elsewhere until this large debt is back on track and being repaid.
The high street bank is just not set up for complex income structures and are set up for a low value, high volume business. Which makes it very difficult for them when a large mortgage in a difficult income structure comes across their desk. Because they do not have the know how and ability to underwrite the case they will simply decline it down to policy. I have recently been referred a client where one of the high street banks had recently declined to lend the funds against a property value of £2,800,000. Current overall client asset holding was around £12m mixed across 2 properties and a share portfolio. The client was also earning a large amount of £1.5m per year and had been with current employer for over 10 years. The banks reason to decline was 'policy'. The policy stated no BTL lending of £1m+. The risk to this particular case was extremely minimal due to existing assets and the property given for security was more than enough to cover the debt needed. After speaking with a private bank regarding the situation we managed to have an offer for the client within a couple of days. (please note each case is looked at in a case by case basis).
I feel a lot of the banks are scared of regulation and do not take full advantage of certain exemptions high net worth clients can take benefit of. They will then use regulation as an excuse not to help, when the regulation is actually there to protect the client and not the bank. When placing £1m+ lending deals I will generally look at private banks now for the following reasons -
- They understand complex income structures.
- They have an old school common sense approach to lending and just want to guarantee the funds will be repaid.
- The underwriter is normally the private banker we deal with face to face and can normally get a verbal agreement immediately with a formal offer once the valuation is completed.
- They will lend as much as a client is looking to borrow without restrictions.
This list could go on and on so if you are having trouble placing larger deals or you are looking to borrow a large amount and have been declined from your bank please get in touch and I would be happy to help. I would love to hear if anybody as had any difficult experiences of obtaining a mortgage larger than £1m . James@mesafc.co.uk
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