Expert insight: Asset rich, income poor - how lenders look at the full picture

Having substantial wealth doesn't necessarily mean a mortgage will be straightforward.

You might own several properties outright, have a seven-figure investment portfolio, hold significant cash reserves or have accumulated considerable wealth through the sale of a business. On any sensible assessment, your financial position may be exceptionally strong.

Yet put a relatively modest salary or investment income into a standard mortgage affordability calculator and the answer can still be no.

It seems counterintuitive. But it highlights an important distinction between income and wealth – and the very different ways lenders assess the two.

Traditional affordability starts with income

Most mainstream mortgage lending is designed around a relatively simple assumption: borrowers earn an income and use that income to make their mortgage payments.

For someone earning a regular salary, that model works perfectly well. The lender establishes how much they earn, considers their expenditure and commitments, applies its affordability model and arrives at a borrowing figure.

The difficulty comes when someone's financial position doesn't fit neatly into that structure.

A retired entrepreneur may have £3 million invested but draw only £60,000 a year. A business owner may retain profits within their company rather than extracting income they don't need. Someone who has sold a business may be living from investments rather than employment.

This is why the answer to whether you can get a mortgage if you have substantial assets but relatively little income depends enormously on the lender.

Some lenders can look beyond the payslip

Certain lenders remain heavily dependent on conventional earned income. Others – particularly private banks and lenders experienced in high-value mortgages – can take a much broader view.

Rather than simply asking what someone earns, they may also consider what assets they own, how liquid those assets are, what income they could reasonably generate and how the client has historically funded their lifestyle.

They may also consider future liquidity events and the client's wider balance sheet.

That doesn't mean you can simply get a mortgage based on net worth rather than income. The lender still needs to be comfortable that the borrowing is affordable.

But it does mean that, with the right lender, significant wealth can become an important part of the affordability assessment.

Not all wealth is treated equally

A £2 million investment portfolio and a £2 million privately owned business may produce the same figure on a personal balance sheet, but they don't necessarily look the same to a mortgage underwriter.

Liquidity matters.

Cash, listed shares, bonds and diversified investment portfolios can generally be valued relatively easily and, where appropriate, converted into cash. Private company shares, carried interest or an interest in a family business may represent substantial wealth but can be much harder to monetise.

Ownership matters too. An asset held personally is different from one held within a company, pension, trust or family structure.

So when a lender takes assets into account for a mortgage, it isn't simply adding up someone's net worth. The underwriter wants to understand what the wealth consists of, who controls it and how realistically it could support the borrowing.

Investments can sometimes support affordability

Some lenders can use an investment portfolio to support mortgage affordability rather than looking only at the income it currently produces.

This is sometimes described as asset-based or asset-depletion affordability.

The lender may take the value of eligible assets and calculate an income that can reasonably be attributed to them over a particular period. This can potentially allow someone with substantial investments but relatively little conventional income to demonstrate considerably greater borrowing capacity.

But there is no universal calculation.

Different lenders may apply reductions to the portfolio value, exclude certain investments or make different assumptions about how long the assets need to support the borrowing.

Two lenders looking at exactly the same portfolio can therefore arrive at very different affordability figures.

Affordability and repayment strategy are different things

Investments can also play another role, particularly with interest-only borrowing.

A substantial investment portfolio, future business sale, maturing investment or sale of another property may potentially be accepted as the strategy for repaying the mortgage capital.

But this is where an important distinction is sometimes missed.

Using investments as an interest-only repayment strategy isn't necessarily the same as using those investments for mortgage affordability.

A lender may be perfectly comfortable that a £2 million portfolio could eventually repay a £1 million mortgage while still requiring sufficient income to demonstrate that the monthly interest payments are affordable.

Other lenders may be prepared to use the assets for both purposes.

Private banks can look at the wider relationship

For some clients, the solution sits outside conventional mortgage lending altogether.

Private banks can often consider the mortgage alongside the client's wider wealth, investments, business interests, future liquidity and overall banking relationship.

In some circumstances, the client may place investments under the bank's management. In others, borrowing against an investment portfolio, potentially through a Lombard facility, may form part of a wider funding strategy.

This is why asking whether private banks lend against assets doesn't have a simple yes or no answer. They can, but the mortgage is normally considered as one part of a much wider financial relationship rather than simply being secured against a large number on a balance sheet.

The full picture can matter more than the headline income

I've always thought "asset rich, income poor" is a slightly unfair description.

Often these clients aren't poor in income at all. They've simply reached a stage where they no longer need to organise their finances around producing a large monthly salary.

Someone with significant wealth, low outgoings and readily available assets may be in a far stronger financial position than their income alone suggests.

Some mortgage lenders struggle to recognise that difference. Others have underwriting models specifically designed to understand it.

The applicant hasn't changed. Their wealth hasn't changed.

The difference is finding a lender prepared to look at the full picture.