Credit Where Credit's Due

12 October 2017

Credit where credit's due

With economic growth during 2017 slower in comparison to that in the second half of 2016, and with no quick resolution in sight, consumers continue to see their spending power slowly eroded. The economy and the housing market are closely linked, so a slowdown in the economy typically leads to a slowdown in the housing market.

The 2016 EU referendum, the 2017 UK General Election, and recent tax reforms can all be attributed to a slowing housing market, with uncertainty impacting market sentiment and changing consumer behaviour, with many deciding to stay put in their existing homes.

Stricter mortgage regulation has been put in place over recent years, including the ‘Mortgage Market Review’ in 2014 and the subsequent ‘Mortgage Credit Directive’ in 2016, meaning borrowing money to purchase a new home can be challenging even for the wealthy. The interpretation and application of such regulations (although well meaning) has led to ‘mortgage prisoners’ such as the self-employed, those requiring interest only arrangements and the retired borrower.

So, how can Brown Shipley help a wealthy family, a business owner or retired borrower navigate the property mortgage market?

See the wood for the trees…

New mortgage regulation has tightened the affordability tests applied by lenders – the high street banks want to see your most recent three years tax returns but what happens if they don’t tell the full story? At Brown Shipley we are relationship-driven and a lending decision is based on the overall financial position and future potential of a borrower. The primary source of the family’s income and ultimately their wealth can often be a family owned business and we will look beyond a client’s tax returns at this source of income. What is the financial health of the business; do the financial accounts show undrawn profits and outstanding directors loans and therefore capacity for the business to pay you more if required?

Equally, many business owners only take an income that they actually need. After all, why pay more tax than you actually need to? Many clients, including retired borrowers, have other potential sources of income that can be used as a means to support mortgage affordability. For example, an investment portfolio from which the underlying investment yield is not currently taken or a pension scheme from which a higher income could be drawn if required.

Your personal wealth balance sheet…

A high net worth client does not always need to borrow money; instead clients often choose to borrow money as part of their overall wealth management strategy. Clients borrow in place of disinvesting to avoid disrupting the longer term investment strategy of any portfolio managed by their wealth manager. As well as being able to use a client’s new home or other residential properties as a means to secure a mortgage loan, Brown Shipley can also use a client’s investment portfolio as collateral if it is anticipated that the investment can generate more of a longer term return above the cost of borrowing and the rate of inflation and this approach is within the client’s accepted appetite for risk.

Establishing a loan secured by your investment portfolio is very straight forward, without the need to incur valuation or legal fees and often at a rate of interest that is lower than rates typically associated to property-backed loans. At the same time, you take away any liability from the family home and the risk is borne by your investments; you remain “in the market”, able to enjoy any potential capital appreciation and income.

Generation Y and the Bank of Mum and Dad…

According to a report published by Legal & General,* parents are predicted to lend more than £6.5bn this year to help their children get on to the housing ladder due to the huge gap between incomes and property prices, matched with the challenge in saving for a deposit. Parents can gift cash to their children to put towards a deposit but it should be designated as a gift – not a loan – or a lender will factor repayments of said loan into its affordability calculations. With parents now involved in more than a quarter of all UK property transactions, it is important to consider the best way that they can support their children. Give away too much money now and you may find yourself short of funds in later life.

If you wish to maintain control of your savings and investments, you may wish to consider the alternative to making a gift, instead using your own investable assets as a means to ‘underpin’ the children’s borrowing requirements without the need to disinvest.

Multi-generational relationships are crucial to a valued wealth management relationship. At Brown Shipley, we understand that wealth means more than money. We help you to focus on the governance of your wealth whilst supporting the next generation at an important time in their lives.

In conclusion

Brown Shipley is an expert in developing sophisticated borrowing solutions for high net worth individuals. We can provide flexible mortgages, loans and overdrafts to help you buy, remortgage and improve residential property by:

Understanding your financial landscape:

Looking at the source of your income and any alternative sources that may exist.

Understanding your personal wealth balance sheet:

Looking at your property and investable assets and how these can be used within any borrowing solution.

Understanding you:

Focusing on how a family can support the next generation whilst preserving the family’s wealth in future years.

* Source: Legal & General and the Centre for Economics & Business Research May 2017.


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