Private Bank Mortgages
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Private Bank Mortgages
Richard Campo explains the mortgage process for Private Bank Mortgages
What is a private bank mortgage?
Fundamentally, a mortgage is a mortgage. It’s a loan against a property. However the structure is really quite different when offered from a private bank as opposed to a high street lender.
One key difference is that the term is often much shorter. So for example, there’s only a five-year term rather than the usual 25-30 year term. It might be because you’re likely to pay the mortgage off in that timeframe. Also, it’s down to the personal nature of the mortgage. Banks might choose to extend the loan for another five years, so you could end up with that bank for a good length of time.
Often private banks only offer interest-only and a lot of them don’t offer any repayment mortgages at all. The vast majority are on floating rates too – linked directly to something called LIBOR, which is changing to SONIA, a money market rate set above the Bank of England base rate.
They won’t necessarily offer fixed rates as such and quite a lot of pricing is bespoke. That said, some of the larger private banks do have a full choice of mortgages so you can do a 25-year repayment mortgage over a five-year fix, but that’s less common in this sector.
You can also lend against different things – shares, planes, boats, other property. It means we can take a much wider view about what sort of assets you can play with and how.
What is the difference between a private mortgage and a standard mortgage?
In addition to the aspects I’ve just talked through is something called a ‘wider relationship’. One of the main reasons why private banks offer mortgages is to acquire clients and get into Assets Under Management (AUM).
Let’s say you’re a very wealthy individual with a share portfolio worth £15 million and you need to borrow £2 million to buy a property. A private bank would invite you to bring a £1million of those assets over to them and offer you a much better mortgage rate. With some, particularly higher risk deals, banks will insist upon it.
We do know a lot of banks and we have a lot of arrangements with them where they do something called ‘dry lending’. That’s just a straight mortgage, not using assets. That’s something we would explore with our clients really early – whether you want to play with your assets or not. Some people do, some people don’t, it’s a very individual choice.
The last thing that’s really different is the entities which banks can lend to. On a normal mortgage, you lend to me and the mortgage would be in my name. But it’s not uncommon to be lending to a trust or a limited company. It might not even be in this country.
We’ve seen that less in recent years because of ATED – the annual tax on enveloped dwellings – where the government is trying to identify the individuals behind these entities.
That’s a very high profile at the moment and this area will change quite a bit I suspect.
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What criteria do I need to meet and how much can I borrow from a private bank?
A lot of private banks don’t lend less than £1 million. Another hard rule is that you need to meet the FCA’s definition of a high net worth individual – which means having an income of £300,000 a year or more or £3 million in net assets.
Once you get beyond that there are no criteria. You can borrow against different assets. You could be internationally mobile. You could have no clear evidence of income. To give you a real example, a client we’re helping out right now has bought and sold many companies over the years and has a share portfolio of around £15 million. But he doesn’t draw an income. If he went to a high street bank they would decline him for a mortgage because of that.
But a private bank will suggest something called monetizing the assets. If you assume a modest return of say 5% per annum, could that income support the loan that you’re after?
The reality is that this client could obviously liquidate assets to buy. It’s not a problem. We ended up securing the loan against his shares because stock markets around the world had just tanked. He didn’t want to sell his shares at low value to buy a property. So we arranged a £2 million loan against the share portfolio. When the shares pick up he’ll sell them to pay the mortgage.
While there are no formal criteria, the matching of clients to banks is important. One factor is geography – some banks will not lend to clients with links to certain jurisdictions. If the country you either live in or originate from is in the ‘high risk’ list it is going to be tougher to get you a loan. Certain banks love clients based in America, Africa, Europe… so geography is a massive factor.
Industry is important as well. Some banks love financial professionals, some like sportspeople. Once we understand those two factors we can draw up a shortlist of banks and start approaching them.
How much interest do private lenders charge?
Certain banks do have rate sheets and strict lending guidelines, but with the majority there is flexibility in what you’re offered. We’ve had multiple examples over the years where someone’s gone to their bank and been offered terms. Then when a second bank offers something better, the first bank says it will match that deal. So if you’ve gone to your bank and got terms, please talk to us because we can often improve what’s on the table.
To put real figures to this, most private banks typically offer 1% to 2% above cost of funds. That is more expensive than the high street, but that’s because there is usually more risk if you’re internationally mobile, an entrepreneur or have very complicated financial affairs.
Arrangement fees tend to be a bit larger as well and are usually a percentage of the loan. Typically it’s between 0.5% to 1% on residential property and 1% to 2% if it’s an investment property. But with private banks everything is negotiable. You may pay more, you may well pay less, because the pricing is very bespoke.
Is a private mortgage a good idea?
Whether it’s a good idea depends on the client’s objectives and their situation. The bigger private banks will start lending at £1 million to £2 million. But the bank is far more interested in the individual. So if you’re a really good client a lot of banks might want to work with you.
Say you are looking to borrow £2 million. We will tell you which is the best private bank option and which is the best high street option. Then we will look at what works for you. A private bank mortgage definitely suits complex clients and international clients. Many people like the fact that it’s highly personal. You will get a specific contact at the bank, they will call you and take you out to lunch. But they will know your affairs and go into a huge amount of detail – not just your income but how it has originated. Some people don’t like that intrusive feeling.
The one big negative around private banking is that their lending policy can change rapidly. A classic example is where banks decided to go big on tech. If you worked in a big tech firm banks fell over themselves to lend to you – but then two years down the line they decide they are over exposed. They’ve got too many tech people on their books so they want to get rid of you.
That can put people in some difficult positions. This is where brokers are really valuable because we know what banks want at different times.
What other advice do you have on private bank mortgages?
This is a phenomenally complex area, not just in terms of the people but also the banks. There have been so many situations where a client has gone to a bank directly and been rejected – yet we know the right person in the bank to talk to and can get a positive answer. Our contacts in this area are so valuable.
If you’re a very successful person you don’t want to be trawling around, you want it to be fast and simple. So come and talk to us. We won’t waste any time. If you’ve come with a deal from your bank, we’ll be able to say straight away whether we can better it.
We can also help when appetites change – we might put you with a bank, but we don’t just leave you there. We’ll make sure we’re talking regularly. There does come a point where high street lending is cheaper and high street lenders are always upping their loan amounts and lowering their margins. So there is always a conversation to be had about the best option for your mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice, however the precise amount will depend on your circumstances. If a fee is charged, a typical fee is £495.