HNWIs and Mortgages – Not as Easy as You Think
While the wealthy should logically be well-positioned to cope with a mortgage, they are often faced with difficulties in securing credit.
Alpa Bhakta, CEO of Butterfield Mortgages Limited, explains below why HNWIs often have trouble with their mortgage applications.
Applying for a mortgage can be a stressful and time-consuming experience for many buyers who find themselves in a complicated situation. Deal with the wrong lender, and the risk of a mortgage application being delayed or ultimately rejected becomes extremely high. This can have significant consequences, particularly if the buyer in question has reached the critical closing stages of a sale.
Importantly, these experiences are not confined to a certain type of prospective homebuyer. In reality, all buyers need to overcome certain hurdles to ensure they successfully receive the finance needed to complete on a property purchase. This is particularly true when it comes to high net worth individuals (HNWIs).
For many, this might come as somewhat of a surprise. After all, there is some truth in assuming HNWIs are better placed to take on debt due to the value of the assets they own. The challenge, however, is that the income structures and financial portfolios of wealthy individuals are anything but simple.
Having worked closely with HNWIs for the best part of two decades, I can say that the wealthier an individual is, the more complicated their financial circumstances are likely to be. There are plenty of reasons why this is the case.
First off, HNWIs tend to have their capital locked up in illiquid assets. These can range from residential and commercial real estate to stocks with low trading volumes. It is also common for wealthy individuals to have their capital tied up in hedge funds which have strict lock-up periods and only a handful of withdrawal intervals.
A second reason has to do with their income structures. Whereas the majority of mortgage applicants regularly receive income payments from their employer, some HNWIs are not employed, or otherwise rely on income being generated from their existing investments. All of this makes incredibly difficult for high street banks to assess the applicant’s ability to regularly pay off existing debt.
Whereas the majority of mortgage applicants regularly receive income payments from their employer, some HNWIs are not employed, or otherwise rely on income being generated from their existing investments.
The fact that mainstream lenders have become risk averse in recent years only makes things more complicated. As a consequence, HNWIs are forced to comply with rigid application processes that do not effectively cater to their needs or unique circumstances.
The mortgage struggles of HNWIs
As a prime property mortgage provider, Butterfield Mortgages Limited (BML) has sought to understand just how common it is for wealthy individuals to be denied credit. To achieve this, BML surveyed a sample of HNWIs living in the UK in January 2021, asking them about their experiences when applying for a mortgage.
There was a standout finding from the survey – just under a fifth (18%) of HNWIs said they have been denied a mortgage in the last 10 years. What’s more, 51% of those who have successfully or unsuccessfully applied for mortgages in the past decade have been rejected at some point. These statistics reaffirm the points I made earlier in this article – namely, that HNWIs are not immune from the complications that could arise from a mortgage application.
What then were identified as the common reasons why mortgage applications were being rejected?According to BML’s research, many of the frustrations arise from the rigid application processes in place. Four-fifths (78%) of wealthy individuals feel that banks rely too much on “tick box” methods when reviewing applications. On top of this, 63% said their complicated income structures ultimately led to their mortgage application being rejected.
These experiences have led to a general sense of frustration among HNWIs who feel that mainstream lenders are simply not equipped to meet their needs. For this reason, 62% of the respondents told BML they have lost faith in their high street bank’s ability to cater to the needs of buy-to-let landlords and property investors more generally.
Looking beyond the high street
BML’s research has uncovered the extent of the problems being faced by wealthy individuals. No doubt, the additional complications posed by COVID-19 would have only exacerbated the issues raised in the survey. While it is not likely to deter investor appetite for bricks and mortar, high street banks are at risk of losing potential clients to competitors.
While property is likely to remain a popular investment opportunity in the UK, the challenge for HNWIs is ensuring they have the necessary finance in place. This means seeking out and dealing with lenders who have experience dealing with wealthy individuals and are willing to work with the clients to deliver a mortgage best suited to their circumstances. Doing so reduces the chances of a mortgage application being delayed or rejected, thereby ensuring the buyer in question can act with confidence.