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Lending Structure Mortgages Frequently Asked Questions
Richard Campo shares his expertise on lending structures, and how they can help high net worth individuals with complex financial situations.
What do we mean by lending structures and what is a structured financial product?
In my world, structure finance typically means development finance which is often run through a company or partnership. But what we’re talking about a bit more broadly here is effectively anything that’s not owned in your personal name.
We’re looking at mortgages here, so that’s primarily about property owned through a limited company, a trust, a limited liability partnership, anything like that.
Can you get a mortgage through a limited company or a trust?
100% – it’s not a problem. Let’s say for example, you own an asset through a limited company. Where this becomes a bit more complex is where the limited company is owned by a trust. Trusts don’t actually directly own a lot of property.
How it works is almost like a flowchart. At the top is the ‘UBO’ which stands for ultimate beneficial owner – the individual or family or people behind this structure. The UBO is the trust itself and that might be incorporated and held somewhere typically offshore or somewhere that’s more tax-friendly than the UK.
Let’s say you’re a property developer with this structure. The trust is set up somewhere like Guernsey. The UK limited company buys a property and both are owned by the trust. But then the individual is the developer, so is actually at the top of the structure – they are the UBO. That’s a nice really straightforward vanilla sort of structure.
Now imagine you’re a very wealthy family. You’re the UBOs and you’ve got the trust structure. You might have all sorts of assets and companies in there, each with different liabilities.
If you put money into a property or a business and that business then folds, you don’t want it to affect your other assets. That’s why they’re set up in different limited companies typically – so if one goes wrong it doesn’t affect another. It’s very logical planning although the reality is that 95% of people don’t hit the threshold that requires this sort of complex structure.
As a mortgage advisor I need to understand this structure. If it’s a relatively straightforward structure then of course we can arrange finance for you.
One of the bigger issues that can come up is something called Origin of Wealth. If the wealth is multigenerational that can get quite difficult, particularly if it’s in a higher risk jurisdiction. As an example, I was approached by a client who I didn’t help – they were based in a very high risk jurisdiction and they were politically exposed. They’d been given an oil field that was worth north of £20,000,000 – and when I asked how it came about they said “Well, the president just likes me.” That’s not something I can help with!
Origin of wealth is one of the biggest stumbling blocks in getting a mortgage through a structure – but if you can evidence that you have sold some properties or a business, it’s not a problem.
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What types of mortgages are available for this?
A mortgage is a mortgage. You can set it up exactly the same way – you can have interest only or repayment, it can be fixed or you can choose a variable rate.
Because we’re typically in the higher net worth world we’re disproportionately weighted to doing interest-only loans. Also, the way that banks price things is typically more variable. For example, a bank might agree to lend you the money, but at a rate of 1% to 2% above cost of funds. If the cost of funds is the Bank of England base rate then your rate goes up or down in line with that.
Fixed rates are less common. Banks might charge 1.5% above cost of funds at a fixed rate for five years. But it’s not like a high street bank where they have a rate card, they’ll go to the market, buy the money in and add their margin on top.
The mortgage runs the same but how it’s priced and your options are more limited compared to more conventional providers. In the high net worth area, you might have set up a limited company for Buy to Let investment property. If you’re a higher rate taxpayer that makes a lot of sense. Liz Truss has just come in as Prime Minister and she’s going to keep corporation tax at 19% (at the time of recording in September 2022). That’s a lot lower than a 40% or 45% income tax bracket. So many people are moving toward limited companies.
It’s also easier to pass property down to children this way – you’re moving the shares of the business. You’re not actually selling the property. These are some of the benefits that it’s worth exploring with your accountant.
We always recommend speaking to an accountant first, then if it still makes sense, we’ll look at appropriate mortgages. There’s no point in setting up a mortgage and then finding that the bank won’t lend to a limited company. It’s really important that we understand what we’re doing to get you the best terms at the outset.
Does the company have to be registered in the UK?
More often than not they will be – most people set up a UK limited company to buy property through. It might be backed or owned by another company or a trust elsewhere, and that’s not a problem.
Having said that, the jurisdictions you play in are really valid. If you’re based in a high risk jurisdiction as listed on the Home Office website, money laundering is a concern. But if the business is registered outside the UK and not in a high risk jurisdiction, it’s still possible, but you will have fewer options.
What level of guarantees do I have to put in place as an owner of the structure?
This is the big one. I spend a lot of time talking to clients about this. Older clients are used to very few checks and very few guarantees. The whole point of setting up things through companies is to mitigate liability.
Again, it depends on what you’re doing. If it’s a vanilla transaction – for example you’re buying an investment property through a company and building a property portfolio, most banks will want some form of personal guarantee. Sometimes it’s limited to the mortgage.
It means that if you fold the business, they can approach you for the money.
On bigger property portfolios, run as a proper limited company with 20-30 properties or more it’s a full-time business. We often go to commercial lenders for Buy to Let portfolios because they’re very good in this area. But they will apply something called a debenture. This is like putting a first or second charge on your property with a residential mortgage.
A debenture in commercial lending sets out that if anything happens the lender wants to be paid first. Debentures can be a little bit complicated. At one level it’s simple. It’s a way for the bank to make sure they get their money back.
But some people don’t like the risk of debentures as they worry that they could affect the day-to-day operation of your business. But one thing I really want to stress is that this only really happens in default. It only applies if things go wrong.
Personal guarantees and debentures are a standard feature with most banks. Some banks will waive or limit them – particularly for higher net worth clients. But the flip side is that the more willing you are to take a personal guarantee or debenture, the better the terms you will get.
How can a mortgage broker help?
Where we pick up most of our business in this area is where it’s gone wrong. People often assume that if they have a business bank account it’s logical to take out a mortgage with that bank.
But then they run into problems, perhaps around debentures and guarantees that may not be clear at the outset. Also, the mortgage terms just may not be competitive.
It’s at that point they talk to us. But I urge you to talk to us at the outset. If you’ve got great terms through your bank we’ll say so, we won’t waste anyone’s time. But there may be something cheaper, you could borrow more money, there may be fewer guarantees. That’s a conversation worth having.
We also have access to banks that you have never heard of. Your time is better spent on your business rather than this – so engage us. We can normally get you a far better outcome and we’ll get to where we need to be very quickly.
Your property may be repossessed if you do not keep up with your mortgage repayments.
There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical amount is £495.