A Client Meets a Lender’s High Net Worth Criteria: What Still Needs to Be Assessed?

There Are Three Different Tests

The phrase “high net worth criteria” can refer to different things. Those differences should be made clear at the beginning.

As at the publication date, the FCA Handbook definition includes a customer with annual net income of at least £300,000, net assets of at least £3 million, or whose obligations are guaranteed by a person meeting an applicable income or asset threshold.

A lender may use different or additional eligibility criteria. Meeting one lender’s commercial definition does not necessarily mean the client qualifies for another lender’s HNW proposition or that the FCA definition applies.

Can the Income or Asset Position Be Evidenced?

Where the relevant classification or lender policy depends on income or assets, the figures must usually be supported by acceptable evidence.

Income Evidence

Depending on the client, a lender may examine:

• salary and contractual allowances;
• bonus, commission or carried interest;
• partnership or limited liability partnership income;
• company profit, salary and dividends;
• investment or rental income;
• international or foreign-currency earnings;
• tax calculations and tax-year overviews;
• employment contracts, payslips and bank statements; and
• whether the income is recurring, discretionary or expected to reduce.

Asset Evidence

The lender may require statements, valuations, ownership evidence or professional confirmation relating to:

• cash and deposits;
• listed investments;
• pensions, where relevant and accessible under lender policy;
• business interests;
• investment and residential property;
• trust or family assets;
• overseas assets;
• private company shares; and
• other valuable but potentially illiquid holdings.

Evidence of gross assets is only the starting point. Existing borrowing, security, ownership, tax and access restrictions can materially change the amount that is genuinely available.

FCA rules also address the evidence required before a firm treats a customer as a high net worth mortgage customer for applicable MCOB purposes.

How Liquid and Dependable Are the Assets?

Two clients can each have £5 million of net assets but present very different lending positions.

One might hold diversified listed investments and substantial cash. The other might own a valuable private company, minority property interests and restricted investments that cannot be realised quickly.

A lender may therefore examine:

• how quickly the assets could be converted to cash;
• whether valuations are current and independently supportable;
• whether assets are pledged or otherwise encumbered;
• whether ownership is personal, joint, corporate or through a trust;
• the volatility and concentration of investment assets;
• restrictions on sale, withdrawal or transfer;
• tax that could arise on realisation;
• currency exposure;
• whether the asset is expected to remain available throughout the mortgage; and
• whether relying on the asset would undermine another financial commitment.

A substantial asset position may support an individual assessment, but it should not be described as immediately available liquidity unless that is factually correct.

What Are the Client’s Cash Flow and Existing Commitments?

Wealth does not eliminate the need to understand the client’s expenditure and debt obligations.

The assessment may include:

• existing residential and investment mortgages;
• portfolio-backed or Lombard facilities;
• personal loans, guarantees and credit commitments;
• school fees and maintenance obligations;
• tax liabilities;
• capital calls and unfunded investment commitments;
• business funding requirements;
• planned gifts or major expenditure;
• the cost of maintaining other properties; and
• changes to income expected during the mortgage term.

Under the FCA’s alternative affordability provisions for applicable HNW mortgage customers, a lender must take full account of income or net assets and committed expenditure when assessing whether the customer can pay the sums due.

A general declaration that the mortgage is affordable is not a substitute for the lender’s assessment.

How Will the Mortgage Be Repaid?

The repayment strategy can be particularly important in high-value and interest-only cases.

Repayment Mortgage

The lender considers whether income and resources can support both interest and scheduled capital repayments over the proposed term.

Interest-Only Mortgage

A suitable repayment strategy must address how the capital will be cleared. Potential strategies may include investments, sale of another property, a known future receipt, business-sale proceeds or other assets accepted by the lender.

The lender may consider:

• the current value of the repayment asset;
• how much value would remain after tax, debt and transaction costs;
• its volatility and liquidity;
• whether it is already pledged;
• whether the client controls the asset;
• when it can realistically be realised;
• the effect of a lower future value; and
• whether a secondary repayment route exists.

Expected investment growth or rising property prices should not be presented as certain. The plan should remain credible under less favourable assumptions.

Is the Property Acceptable Security?

High net worth status does not make every property acceptable to every lender. The property remains central to the mortgage assessment.

Relevant considerations can include:

• market value and loan-to-value;
• location and marketability;
• construction type and condition;
• lease length and title restrictions;
• planning and building-regulation history;
• single-unit, multiple-unit or mixed-use occupation;
• commercial activity or agricultural restrictions;
• tenancy arrangements;
• planned refurbishment or development;
• insurance availability;
• environmental or cladding concerns; and
• the valuer’s assessment of demand and saleability.

A low loan-to-value can strengthen the security position, but it does not automatically resolve affordability, title, property-condition or repayment concerns.

FCA responsible-lending rules state that affordability must not be based on equity in the mortgaged property or an expected increase in property prices.

Is the Proposed Facility Structured Appropriately?

Once the client and property are understood, the proposed terms still require assessment.

This may include:

• the mortgage amount and loan-to-value;
• capital-and-interest, interest-only or part-and-part repayment;
• fixed, tracker or variable pricing;
• the mortgage term;
• currency of borrowing;
• arrangement and renewal fees;
• early repayment charges;
• overpayment and portability features;
• personal, corporate, partnership or trust ownership;
• additional property or investment security;
• private banking or assets-under-management conditions; and
• the consequences of changing the wider banking relationship.

A lender may offer flexibility that is valuable to the client, but the cost and conditions of that flexibility should be understood before completion.

Stress-Test the Position Beyond Today’s Figures

The assessment should consider reasonably foreseeable changes, not only the client’s current balance sheet.

The review may also need to consider retirement, relocation, changes in residency, currency movements, future capital calls, tax payments and other commitments competing for the same liquidity.

When to Involve Willow

An early, anonymous discussion may be worthwhile where:

• the client meets an HNW threshold but standard affordability does not reflect their position;
• income is substantial but irregular, discretionary or drawn from several sources;
• the client has significant assets but limited conventional earned income;
• the proposed repayment strategy uses investments, business assets or another property;
• the client requires a large interest-only or part-and-part mortgage;
• international income, assets or residency complicate the application;
• the property falls outside standard lender criteria;
• a private bank has introduced an investment or deposit requirement;
• existing debt or capital commitments require careful treatment; or
• the adviser wants to establish likely lender appetite before identifying the client.

The opening outline can remain anonymous. The property value, required borrowing, income, approximate assets, existing liabilities, repayment plan and principal complication will usually establish whether a fuller assessment is worthwhile.