Interest rates have dominated the headlines in 2023. As inflation remains sticky and well above its 2 per cent target, the Bank of England’s monetary policy committee has voted on 14 consecutive occasions to hike the base rate.
The impact on mortgage customers has garnered a great deal of political and media interest.
Understandably, the fate of high-net-worth individuals seldom enters the conversation, but within the mortgage market we cannot afford to overlook the issues affecting such borrowers.
Indeed, now is an opportune moment for lenders and intermediaries to take stock of the challenges that HNWIs face when looking to secure, and in the current climate repay, a mortgage.
Moreover, we must consider what can be done to ensure wealthier borrowers are offered suitable support in the higher interest rate environment.
The challenges involved in HNW mortgages
It may seem entirely counter-intuitive to think that HNWIs will regularly struggle when it comes to securing a mortgage. Yet this remains the reality; they run a surprisingly high risk of being turned away by conventional lenders.
For context, Butterfield Mortgages conducted research in the past, surveying more than 500 UK adults who all had a net worth in excess of £1mn. We found that 12 per cent had been rejected for mortgages in the preceding decade.
But why are so many HWNIs turned down for a mortgage?
It comes down to the often complex and diverse nature of HNWIs’ wealth – their income, investments and liquidity.
As a rule of thumb, the wealthier an individual is, the more complicated their income structure and finances are likely to be.
For instance, HNWIs tend to have their capital locked up in illiquid assets, spread across multiple jurisdictions. Meanwhile, they may have irregular or no formal source of income, and perhaps have not built up an attractive credit profile by repaying regular debts.
As a result, the process of applying and being approved for a mortgage can be far more complex for these individuals.
The standard ‘tick-box’ methodology applied by many high street lenders can pose unexpected complications, simply because how HNWIs make, spend and invest their money typically differs significantly from most prospective borrowers.
Further, HNWIs may not be UK residents, and they may also differ in the reasons they want or need a mortgage, both of which would create additional obstacles.
Many lenders will not supply finance for a property that will not be an individual’s primary residence, nor to an overseas buyer.
As such, HNWIs seeking finance for a buy-to-let investment or a second home will often struggle to find a mortgage on the high street.
Lenders and brokers require skill and experience
HNWIs being rejected for mortgages remains a prevalent issue.
As noted, they are ill-suited to the methodology that many mainstream, high street lenders apply to assess mortgage applications.
Meanwhile, their desire for a loan to purchase an investment property naturally rules out a swathe of other lenders.
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Clearly, HNWIs need to find specialist lenders and brokers who are well-versed in this type of client.
More specifically, they need lenders and brokers that have the skill, experience and resources to review each borrower and application on a case-by-case basis; to take in the full picture of the person’s financial profile, to understand the type of property they want to buy and why, and to assess their ability to repay a loan.
In essence, a more bespoke approach is required when working with HNWIs.
Lenders and brokers reliant on processing huge volumes of applications will, generally speaking, not have the structures and processes in place to operate in such a flexible manner.
Returning to the matter of rising interest rates – this economic shift over the past 20 months has only heightened the challenges that exist for HNWIs, thereby placing a greater onus on lenders and brokers to assist wealthier borrowers as they seek to navigate the mortgage market.
How higher rates affect HNWIs
For more than 13 years – between March 2009 and May 2022 – the BoE’s base rate resided below 1 per cent. It was never going to remain at such historic lows, which were largely indicative of economic turbulence stemming from the global financial crash, Brexit and the pandemic.
That rates would rise at some point was a given. As many who are longer in the tooth would also note, a base rate of 5 per cent or higher is also normal in the grand scheme of things – this was the general benchmark for much of the 1990s and 2000s, while the 1980s saw a base rate predominantly in double figures.
However, while a higher base rate is by no means atypical, the speed at which it has risen has undoubtedly created challenges for borrowers.
Jumping from an all-time low of 0.1 per cent in December 2021 to 5.25 per cent by August this year is a sharp rise, and coming after a prolonged level of such low rates, has placed a strain on many people who will have purchased properties with little consideration as to how such a shift could impact them.
HNWIs are no exception here. Again, while not featuring in the general discourse around higher rates and the impact on mortgage customers, HNWIs warrant attention and support.
Broadly speaking, HNWIs direct their investments towards high-value properties, such as those in prime central London. They may, for example, require a £5mn mortgage for the purchase of a £7.5mn townhouse in a prime central London postcode.
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Coupled with the size of the mortgages HNWIs take on is the length of their terms. HNWIs investing in a second home or BTL property may take on mortgages that have five or 10-year terms, unlike the 25 or 30-year terms that most UK homebuyers will be able to access.
If not on a fixed-term loan, the hikes to the base rate since the end of 2021 will have taken a notable toll on even very wealthy borrowers. With less time to spread out increased costs on an already large mortgage, some HNWIs will be struggling to make repayments.
Again, the complicated nature of their finances and investments comes into play. HNWIs might be asset-rich (owning all manner of assets) but have limited access to liquid cash.
Seeing their mortgage repayment skyrocket will require them to release equity from other investments or access cash from other sources.
As with the application process, it is important that preconceptions do not cloud the due attention that HWNIs require. Those lenders and brokers who are used to operating in this space will likely be acutely aware of this point.
Improving support for HNWIs
Butterfield Mortgages recently conducted a survey of mortgage customers in the UK. It revealed that just 44 per cent of borrowers feel they have received satisfactory guidance and communication from their mortgage providers since the initiation of the interest rate hiking cycle in December 2021.
This underscores the importance of lenders working with borrowers to recognise potential issues as they arise and, whenever possible, bringing forward solutions.
The necessity for this aid extends to HNWIs regardless of their affluence, and lenders must be unwavering in their dedication to aiding borrowers who need to continue to invest in property with a sense of assurance.
Alpa Bhakta is the chief executive of Butterfield Mortgages
By Alpa Bhakta
Source: FT Adviser
