In the spirit of covering all our angles, many of our clients are able to get some interesting deals from Private Banks, who specialise in the High Net Worth space.
With this in mind I asked one of our very own Rob Gill to update us on the latest.
While mainstream lenders have made steady inroads into the large loan market in recent years, there are still many reasons why Private Banks remain a good choice for certain borrowers. Mainstream lender options are thin on the ground above loan sizes of £3m, while the relatively complicated income streams of High Net Worth borrowers often means only Private Banks can stretch to the loan sizes required.
The world of Private Banking is far from static with new entrants, criteria and regulation affecting this segment of the market as much as any other. At Coreco we constantly talk to our Private Bank partners, keeping abreast of changes in the market and individual lender criteria, as well as tracking new entrants. Here we present some of the more recent and interesting innovations and developments.
The Mortgage Credit Directive (MCD)
Now that the dust has settled around this piece of European legislation brought in on March 21st, perhaps the most significant change is the rules around ‘Foreign Currency Mortgages’. Whatever we understood the term to mean previously, the new legislation defines it as a loan where any part of the income used to justify affordability is in a currency different to that of the mortgage. Crucially, this applies to income denominated in a foreign currency at any stage, even if it is paid to the employee in pounds. Thus an executive at a US Investment Bank whose bonus is denominated in dollars before being paid in pound is deemed to earn that part of their income in a foreign currency. Under the new regulation, lenders are obliged to monitor this currency risk for such borrowers, and as a consequence the majority of mainstream lenders will not include such ‘Foreign Currency Income’ when assessing a borrowers’ affordability.
Private Banks however are well versed in monitoring exchange rate exposure for clients, largely on the wealth management side, and have been able to adapt to the MCD regulations fairly seamlessly. They have therefore become an increasingly important option for a whole host of Investment Bankers, Lawyers and indeed any executives working for large, multi-national companies. A small number of Private Banks are, rather surprisingly, not yet ‘MCD ready’, catching out some clients seeking to rollover existing loans.
‘Assets Under Management’, ‘Ongoing Client Relationship, ‘Wider Business’; all terms those who deal with Private Banks are familiar with. It is however a misnomer that clients must meet a certain minimum requirement of AUM to be eligible for a Private Bank as they become increasingly innovative in their approach. Indeed, such lenders can now be split broadly into three types; those who demand AUM on day one of the loan, those prepared to look at client potential and other ways of earning additional income, and a number who do not require any wider business and will proceed on the basis of the loan itself (a ‘dry lend’).
An increasing number of Private Banks are willing to look at loans below the traditional boundary of £1m, offering loans as low as £250k to clients who need the flexibility offered by Private Bank lenders. This is an increasingly useful option for clients who don’t require a seven figure loan but who may earn income in foreign currency, are based overseas and purchasing a UK investment property or pied a terre, returning ex-pats with no recent employment or residence history in the UK, and those with income structures which put them outside the criteria of mainstream lenders.