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.
Clearly, HNWIs need to find specialist lenders and brokers who are well-versed in this type of client.
