A Private Bank Offers Investment Management and Lending: How Should the Combined Cost Be Compared?

Start by Separating the Two Decisions

A combined proposition contains at least two distinct questions:

1. Is the mortgage or property-finance facility appropriate for the client’s requirements?
2. Is the private bank’s investment-management service appropriate for the client?

Each component should be capable of being explained on its own merits. Only then should the adviser examine whether combining them improves the overall outcome.

This prevents a particularly attractive feature in one area from concealing a material disadvantage in another. A lower mortgage rate does not automatically justify a more expensive or unsuitable investment arrangement. Equally, a strong investment proposition does not make an unsuitable mortgage appropriate.

Identify the Full Mortgage Cost

The headline interest rate is only one component of the borrowing cost. The mortgage assessment may need to include:

• the initial interest rate or lender margin;
• the reference rate where pricing is variable or tracker-based;
• the expected interest cost on the anticipated balance;
• arrangement, application and renewal fees;
• valuation and lender legal costs;
• the client’s own legal and advisory costs;
• broker fees, where applicable;
• early repayment charges or minimum-interest periods;
• costs attached to making overpayments or changing the facility;
• foreign-exchange costs where borrowing or income is in another currency;
• the effect of capitalised interest; and
• any pricing condition linked to maintaining deposits or investments.

The repayment structure also matters. Comparing an interest-only private bank mortgage with a capital-and-interest alternative solely by monthly payment would not be comparing equivalent outcomes.

The model should therefore use the expected balance through time, the same repayment assumption and an appropriate range of interest-rate scenarios.

Identify the Full Investment Cost

The investment comparison should examine all costs associated with the service and underlying investments, not only the private bank’s headline management fee.

Depending on the proposition, these may include:

• initial financial-planning or implementation charges;
• ongoing advice charges;
• discretionary fund-management fees;
• custody, platform or account charges;
• underlying fund or product charges;
• dealing commissions and transaction costs;
• bid-offer spreads or price mark-ups;
• foreign-exchange charges;
• performance fees or carried interest, where applicable;
• charges for alternative, structured or bespoke investments;
• termination, transfer or switching charges; and
• the cost of retaining cash or deposits at rates below available alternatives.

FCA investment-cost rules can require applicable firms to aggregate relevant charges so that clients can understand the overall cost and cumulative effect on investment returns. The client can also request an itemised breakdown where the relevant rules apply.

Include the Cost of Entering the New Relationship

The private bank’s ongoing charges may not capture the full cost of transferring from the current arrangement.

The wealth manager and relevant advisers should consider:

• whether investments can transfer in specie;
• which holdings must be sold, converted or replaced;
• dealing charges and bid-offer spreads;
• possible time outside the market during a cash transfer;
• foreign-exchange costs;
• loss of discounted or institutional share classes;
• exit fees or termination charges;
• the tax consequences of disposals;
• the effect on tax wrappers or ownership structures; and
• professional costs associated with restructuring the portfolio.

Tax consequences should be assessed by the client’s tax adviser. Willow does not determine whether investments should be sold or how a transfer should be implemented.

Transition costs should normally be shown separately because they affect the first-year comparison more heavily than later years.

Build the Combined Cost Model

The comparison should use the same time period, borrowing amount and reasonable assumptions for each option. It should distinguish contractual costs from uncertain outcomes.

The calculation should normally be repeated over several periods—for example, one, three and five years—because a significant initial transfer cost may have a different effect over a longer relationship.

Where interest rates are variable, the same rate scenario should be applied consistently to both mortgage options. Where investment fees are tiered, the model should account for changes in portfolio value without assuming positive growth.

Cost Is Important, but It Is Not the Entire Assessment

A more expensive combined proposition may still provide services or lending flexibility that the client values. These benefits should be identified clearly rather than assumed.

Potential benefits could include:

• individual underwriting of complex or international income;
• a larger loan or more suitable repayment structure;
• access to interest-only lending supported by wider assets;
• coordinated cash, investment and credit management;
• a dedicated relationship manager;
• faster access to decision-makers;
• consolidated reporting;
• international banking or currency services;
• future borrowing capacity; and
• specialist support for trusts, family offices or business owners.

The comparison should state which services the client expects to use. A feature has limited practical value if it is unlikely to be relevant to the client.

Conversely, retaining separate mortgage and wealth-management providers may offer continuity, investment independence, wider lender access or reduced reliance on one institution.

Stress-Test the Combined Relationship

The proposal should also be tested against changes that could occur after completion.

Mortgage Rates Rise

If borrowing is variable, how would higher interest affect the package comparison? Would the private bank retain the same margin, and does the client have sufficient cash flow?

Investment Values Fall

Would a lower portfolio value alter fees, relationship eligibility or mortgage pricing? If assets are pledged, would a market fall create collateral requirements?

The Client Withdraws Capital

Can the client remove investments to fund expenditure, gifts, tax or another purchase without affecting the mortgage or banking status?

The Client Changes Investment Manager

Can the investments move while the mortgage remains in place? Would pricing change, or would the client need to refinance?

The Property Is Sold Early

What early repayment charges apply? Can the mortgage be transferred to another property, and can the investment relationship continue independently?

The Initial Mortgage Term Ends

Is renewal automatic? Could the bank reprice the facility or require a larger relationship balance? Is there a credible refinancing alternative?

Compare the Package With Genuine Alternatives

The relevant alternative should be a lending route that could realistically serve the client—not an unavailable headline mortgage rate.

Willow may compare the private bank proposition with:

• another private bank with different relationship requirements;
• a high-net-worth mortgage lender without an investment-management condition;
• a specialist bank using individual underwriting;
• a conventional lender able to accommodate the client’s income and loan size;
• a mortgage secured across more than one property;
• a second-charge facility that preserves an existing first mortgage;
• short-term finance followed by a planned refinance; or
• a lower borrowing requirement supported by another source of client capital.

Willow can quantify the property-finance differences, including interest, fees, term, repayment structure and lender conditions. The wealth manager can then compare the investment services and charges on a like-for-like basis.

Keep the Professional Responsibilities Clear

Willow Private Finance

Willow assesses the mortgage, identifies relevant property-finance alternatives and explains the lending costs, conditions and repayment implications.

The Wealth Manager or Financial Adviser

The wealth manager assesses investment suitability, portfolio risk, service quality, transfer implications and the costs and benefits of changing investment arrangements.

The Private Bank

The private bank should provide clear information about mortgage terms, investment charges, relationship requirements, security arrangements and what happens if the client changes or ends part of the relationship.

The Tax and Legal Advisers

Tax and legal advisers consider disposals, ownership, tax wrappers, cross-border matters, mortgage documentation and any link between the investment and lending agreements.

When to Involve Willow

An early, anonymous discussion may be useful where:

• a private bank has offered a mortgage alongside investment management;
• preferential mortgage pricing depends on assets being transferred;
• the adviser wants to establish whether the mortgage benefit is available elsewhere;
• the client requires a large or complex interest-only mortgage;
• the investment relationship must be established before property completion;
• the client is concerned about losing flexibility to move assets later;
• the mortgage and investments may both form part of the bank’s security;
• the combined costs have not yet been shown in cash terms;
• the client values the private banking service but wants an objective property-finance comparison; or
• the existing wealth manager wants to preserve responsibility for the investment advice.

The initial outline can remain anonymous. The property value, mortgage amount, proposed rate, fees, expected asset transfer and principal relationship conditions are normally sufficient to begin testing the lending proposition.