High-value & private bank mortgages:
A question of structure
With a conventional mortgage, the starting point is often relatively simple: how much do you need to borrow, and over what term?
At the higher end of the market, there can be considerably more to consider.
A client may have substantial investments, business interests, several properties or a future liquidity event. They may have enough capital to reduce the mortgage significantly but prefer not to sell investments, extract money from a business or tie up too much cash in their home.
The question therefore isn't always simply, "How much can I borrow?" It may be, "How should I structure the borrowing around everything else I have?"
There isn't one correct answer. A well-structured high-value mortgage should reflect the property, the client's income and wealth, their need for liquidity, their plans for the future and, where appropriate, their wider tax, investment and estate-planning strategy.
How much should you actually borrow?
Being able to put down a larger deposit doesn't necessarily mean doing so is the right decision.
A larger deposit can reduce the loan-to-value, potentially improving lender choice and mortgage pricing. But using more capital for the purchase may mean selling investments, withdrawing money from a business or simply leaving less cash available for other purposes.
Conversely, retaining a larger mortgage may preserve liquidity or allow investments to remain in place, but increases borrowing costs and financial risk.
The appropriate balance will be different for every client.
Before selling investments, extracting funds from a business or making decisions with tax consequences, speak to your accountant, tax adviser or wealth adviser as appropriate.
Repayment, interest-only or a combination?
Interest-only borrowing is particularly common in the high-value mortgage market.
For some clients, it is simply a way of reducing monthly mortgage payments. For others, it is a deliberate financial decision that allows capital to remain invested or available elsewhere.
There are generally three broad approaches:
Repayment: Each payment reduces both the interest and capital.
Interest-only: Monthly payments cover the interest, with the original capital repaid separately.
Part-and-part: Part of the mortgage is repayment and part interest-only.
A client might, for example, choose to repay part of the borrowing conventionally while matching the interest-only element to an existing investment portfolio or anticipated future liquidity event.
There is no universally preferable structure.
Where choosing interest-only would allow capital to remain invested, discuss the investment implications and risks with your wealth or investment adviser rather than comparing the mortgage cost and expected investment return in isolation.
What will ultimately repay the mortgage?
For interest-only borrowing, the repayment strategy is fundamental.
Depending on the lender and client's circumstances, this might include:
An investment portfolio.
Sale of another property.
Sale of the mortgaged property.
Maturing investments.
A future business sale.
Vesting shares or another identifiable liquidity event.
A combination of several strategies.
A repayment strategy that appears entirely logical to the client may not necessarily satisfy every lender.
Banks consider issues such as certainty, timing, liquidity and the likely future value of the asset. A £2 million diversified investment portfolio, for example, may be easier for a lender to assess than an anticipated £2 million from the future sale of a privately owned business.
The strategy therefore needs to work both financially for the client and from the lender's underwriting perspective.
Where the repayment strategy depends upon investments, business assets, estate planning or a future financial event, it should also be considered with the relevant professional adviser.
Should your investments form part of the solution?
Investments can play several very different roles in a high-value mortgage.
They might simply demonstrate the client's wider financial strength.
Alternatively, certain lenders may be able to use investments when assessing affordability, accept them as an interest-only repayment strategy or lend on the basis that some of those assets will be transferred to the bank.
These are very different propositions.
It is important to distinguish between:
Owning investments.
Using investments to demonstrate wealth.
Using investment income or portfolio value for affordability.
Using investments as an interest-only repayment strategy.
Transferring assets under management (AUM) to a private bank.
Borrowing against investments through Lombard or securities-backed lending.
Not every lender can do all of these, and not every investment portfolio will be acceptable.
Liquidity, diversification, ownership, management and the type of underlying assets can all matter.
Before restructuring, transferring or borrowing against an investment portfolio, discuss the implications with your wealth or investment adviser.
Could Lombard lending form part of the structure?
For clients with substantial investment portfolios, a mortgage doesn't necessarily have to provide all of the required borrowing.
In some circumstances, a private bank or wealth manager may be able to provide a Lombard loan or other securities-backed facility alongside the mortgage.
This can provide access to capital without requiring investments to be sold, but it introduces a different form of risk. If the value of the underlying investments falls sufficiently, additional security or repayment may be required.
It should therefore be considered as part of the client's overall borrowing and investment position rather than simply as an alternative source of cheap capital.
Lombard lending places investment assets at risk and should be discussed with the private bank or wealth adviser responsible for the underlying portfolio.
Is a private bank actually necessary?
A large mortgage doesn't automatically require a private bank.
Depending on the circumstances, high-value borrowing may be available through:
Mainstream banks.
Private banking divisions of larger banks.
Building societies.
Specialist high-value lenders.
Independent private banks.
For a client with straightforward income and a conventional property, a lender capable of providing a £2 million mortgage without requiring investments to be transferred may be preferable to a private bank requiring a wider relationship.
In other circumstances, the flexibility of a private bank may be invaluable.
The question isn't whether private banking is inherently better. It is whether the private bank's approach provides something useful for that particular client and transaction.
Should the mortgage form part of a wider banking relationship?
Private bank mortgages often need to be considered differently from standalone mortgage products.
Some private banks are happy to provide property lending without requiring substantial additional business. Others may expect the client to establish a broader relationship involving cash, investments, deposits or assets under management.
That relationship can sometimes enable the bank to take a more holistic view of the client's finances.
But it also means mortgage pricing shouldn't necessarily be considered in isolation.
If one bank offers a particularly attractive mortgage but requires £2 million of investments to be transferred to its wealth management division, the cost, performance, service and suitability of that investment relationship are also important.
Before transferring investments or changing wealth manager to satisfy an AUM requirement, discuss the wider implications with your existing wealth adviser and the proposed private banker or investment manager.
How much liquidity should you retain?
High-value property purchases can absorb considerable amounts of capital beyond the deposit itself.
Stamp Duty Land Tax, professional fees, renovation costs and the ongoing costs associated with the property may all need to be considered.
A client who could theoretically purchase with a very small mortgage may therefore deliberately choose to borrow more and retain a larger cash reserve.
Likewise, someone with significant investment wealth may not necessarily want to liquidate a portfolio simply to minimise mortgage borrowing.
Liquidity after completion can be every bit as important as the deposit used to complete the purchase.
Where the decision affects investment strategy, business cash flow or tax planning, consider the appropriate level of liquidity with your accountant, tax adviser or wealth adviser.
How long should you expect to keep the borrowing?
A 20 or 25-year mortgage doesn't necessarily mean the client expects to retain the debt for that long.
High-value borrowers may anticipate significant financial events during the mortgage term:
A business sale.
Share vesting.
A large bonus.
Sale of another property.
Maturity of investments.
Inheritance.
Retirement.
Relocation.
These events can influence the appropriate mortgage structure from the outset.
A client expecting substantial liquidity in three years may place greater importance on early repayment flexibility than someone expecting to retain the mortgage for the foreseeable future.
Fixed rates, variable rates, early repayment charges and the ability to make significant capital reductions should therefore be considered alongside the headline interest rate
Could additional assets or property support the borrowing?
The property being purchased doesn't always have to be considered in isolation.
Some lenders may be prepared to take additional security over another property, investment portfolio or cash deposit.
This can sometimes reduce the effective loan-to-value against the main property, increase borrowing capacity or make a transaction possible that wouldn't work on a conventional standalone basis.
However, providing additional security also means placing more of the client's assets within the lending arrangement.
Before offering investments, business assets or additional property as security, consider the wider financial, legal and tax implications with the relevant professional advisers.
How should ownership fit into the wider strategy?
For some high-value transactions, who owns the property can be as important as how it is financed.
The appropriate structure might involve individual ownership, joint ownership, a company, trust or another arrangement, depending upon the property and circumstances.
Mortgage availability can vary considerably between structures, and a structure chosen for tax, succession or estate-planning reasons may significantly influence which lenders can provide the finance.
It is therefore important that ownership and borrowing are considered together rather than one being decided without reference to the other.
Property ownership can have significant legal, tax and estate-planning consequences. Your solicitor, tax adviser and estate planner should determine the appropriate ownership structure; your mortgage broker can then establish which lenders can finance it.
Think about the wider strategy
A high-value mortgage rarely exists completely independently of everything else.
Decisions made about the mortgage can affect investments, liquidity, businesses, tax planning and longer-term estate planning. Equally, decisions made elsewhere in the client's financial affairs can influence how the mortgage should be structured.
That makes communication between advisers particularly important.
Depending on the circumstances, that might involve the:
Mortgage adviser – mortgage structure, lender selection and borrowing strategy.
Wealth adviser or investment manager – investment strategy, portfolio risk and liquidity.
Accountant or tax adviser – taxation and the implications of extracting or moving capital.
Private banker – banking relationship, AUM, credit facilities and wider private banking proposition.
Solicitor – property ownership, legal structure and security.
Estate planner – succession, trusts and longer-term ownership considerations.
The objective isn't for one adviser to make decisions that properly belong to another. It is for the different parts of the client's financial strategy to work together.
Bringing the structure together
PROPERTY
Purchase price • Deposit • Loan-to-value • Security
BORROWING
Loan size • Repayment or interest-only • Term • Rate • Flexibility
INCOME & WEALTH
Income • Investments • Businesses • Property • Other assets
LIQUIDITY
Cash reserves • Capital requirements • Investments • Future liquidity
REPAYMENT STRATEGY
Investment portfolio • Property sale • Business exit • Future capital
LENDER SELECTION
Which lender's approach fits the overall structure?
WIDER STRATEGY
Tax • Investments • Business • Estate planning • Ownership
BANKING RELATIONSHIP
AUM • Deposits • Wealth management • Private banking
The Bottom Line
Structuring a high-value mortgage isn't simply about finding the maximum loan or lowest interest rate.
It is about deciding how much capital should be committed to the property, how much should remain available elsewhere, how the mortgage should be serviced and ultimately repaid, and whether investments or a wider private banking relationship should form part of the solution.
An experienced high-value mortgage broker can help structure the borrowing and identify lenders capable of delivering it. But the mortgage may be only one component of a much wider financial strategy.
Where decisions have investment, tax, legal, business or estate-planning consequences, the appropriate professional advisers should be involved.
The objective is not simply to find a lender willing to provide the mortgage.
It is to structure the borrowing around the client's wider financial position and future plans.