After a study by Investec showed that high net worth individuals find obtaining a mortgage difficult, we delve into details about why this problem exists. 

A recent study by Investec found that 90 per cent of high net worth individuals have had rejections for mortgage applications. As a result, they have had to accept lower loan-to-value (LTV) ratios than they wanted. Lenders were not able to understand their complex incomes.

The most common problem was non-standard income – such as receiving a large part of their pay in bonuses, another form of discretionary income or being paid in foreign currency – which prevented them from accessing higher LTVs. On average, they had to accept LTV reductions of 20 per cent, the research shows.

On top of this complexity, interest rates have risen to the highest level since before the 2008 crash, upending assumptions about the pricing of loans, and risks. 

“In some ways the lending markets still haven’t fully recovered from the impact the pandemic had on lender risk appetites and their criteria,” Edward Riordan, manager, mortgage advice service at Close Brothers Asset Management, told WealthBriefing.

“Pre-pandemic, there was scope to apply flexibility to certain areas of lender criteria, which is often required for HNW individuals, given their unique circumstances. These areas include those who may have large variable income from multiple sources, overseas income, or a recent change in employment status,” Riordan said. “We are still finding, in many cases, that the lenders that were once flexible, are just not willing to take a view anymore. The volatile interest environment seen over recent times, hasn’t helped the situation, but it is hoped that as rates begin to fall and the market settles a little, some more flexibility may return.” 

“What the last few years has done is place a much greater emphasis on HNW individuals to seek appropriate advice and assistance from an experienced and well-connected mortgage professional. All hope is not lost, as with a deeper understanding of the client's circumstances, there are still potential avenues to be explored,” Riordan added.

Appetite for lending has been hit by the tightening of credit over the past two years.

“As in previous cycles of liquidity tightening, there is often a decline in the number lenders willing to lend to ‘non-standard’ borrowers – such as non-domiciles, entrepreneurs, and corporate executives,” Iain Mcleod, head of private client consultancy at St James’s Place, added. “Sometimes, the simplest option for the lender is to reduce the LTV on offer until conditions improve, as occurred during the global financial crisis and its aftermath.”

“Whilst indications are that credit conditions are beginning to improve in the UK, there is a mis-match in lending expections for HNW individuals in particular," McLeod continued.

“A recent trend which may have fuelled this position has been the rise in non-standard incomes – for example, tech companies who need to reinvest heavily in their businesses but need to generously remunerate key individuals through stock options, restricted stock units (RSUs) and other forms of equity compensation. Similarly, entrepreneurs may draw minimum salaries but extract value from their business in other ways, particularly during a more challenging economic backdrop,” he added.

“Similarly, non-domiciles have often sought the largest possible LTV against their UK properties – as this is favourable to them from an IHT perspective. However, due to the operation of the remittance rules, these mortgages could not be secured against foreign assets, requiring more flexibility from their lenders,” Mcleod said. (These comments came at a time when the status of non-doms in the UK has been under threat. Last week the UK Chancellor of the Exchequer, Jeremy Hunt, announced that the government would end the non-dom system, further complicating the picture.)

“The recent period of ultra-low interest rates and quantitative easing fundamentally altered the relationship between HNW borrowers and their liquidity. Lower interest rates meant there was little incentive to hold cash for immediate liquidity, especially with favourable credit conditions and accommodative lenders,” McLeod added. “This position is now somewhat reversed. It is important for HNW individuals to consider their overall liquidity needs and ensure that this is factored into their long-term financial planning, ensuring current conditions and borrowing decisions do not risk impairing their longer-term financial security.” 

“Such findings suggest that just because a person has a large amount of wealth does not necessarily mean they don't struggle for credit, particularly if assets are complex, illiqiuid or tied up in various ways. A number of specialists work in HNW mortgage lending in the UK, a topic explored here,” Mcleod said. See here for more details about the Investec report. 

The field of HNW lending is a specialist one. A number of organisations work in HNW mortgage lending in the UK, a topic explored here.

The changes in credit market conditions have had other effects, such as a major inflow into money market funds in the US, although that seems to be less pronounced in Europe. (See this report.)