A client owns investments worth more than the proposed interest-only mortgage. That may appear to provide a straightforward repayment strategy, but the lender still needs to understand whether the assets are acceptable, sufficiently evidenced and realistically capable of repaying the capital at the required time.
Willow supports professional advisers through its wealth manager and financial adviser partnership service. This article forms part of Willow’s HNW clients, private banking and property finance guide series.
Willow assesses the mortgage, lender criteria and required evidence. The wealth manager remains responsible for investment advice, portfolio suitability and explaining how the proposed repayment plan interacts with the client’s wider financial objectives.
The Regulatory Starting Point
For applicable regulated mortgages, FCA rules state that a lender may only enter into an interest-only mortgage where it has evidence of a clearly understood and credible repayment strategy that has the potential to repay the capital and any interest reasonably expected to accrue.
The FCA rules also state that a lender must not accept a speculative repayment strategy. Regular investment contributions and periodic capital repayments from irregular income are identified as examples that may be acceptable, subject to the client’s circumstances.
This does not mean every lender accepts every investment arrangement. Each lender maintains its own policy covering:
- acceptable investment types;
- minimum current values;
- loan-to-value limits;
- ownership requirements;
- acceptable providers or management arrangements;
- documentary evidence;
- whether valuation discounts are applied; and
- whether the strategy is reviewed during the mortgage term.
A repayment strategy can therefore be credible in general terms but still fall outside a particular lender’s policy.
The wealth manager explains the portfolio and advises on the investments. The lender decides whether those assets constitute an acceptable mortgage repayment strategy.
Who Owns and Controls the Investments?
The first check is whether the borrower has sufficient legal and practical control over the proposed repayment assets.
The wealth manager may need to establish:
- whether the investments are owned solely or jointly;
- whether all owners are parties to the mortgage;
- whether the assets are held personally, corporately or through a trust;
- whether trustees, directors or other parties must approve a withdrawal or sale;
- whether the assets are held for another person or purpose;
- whether the client has a beneficial interest but no direct control;
- whether ownership could change during the mortgage term; and
- whether divorce, succession or estate arrangements affect availability.
A client’s connection to a family company, trust or family portfolio does not necessarily mean the relevant value is available to repay their personal mortgage.
Where ownership is complex, the lender may require legal or tax advice rather than relying solely on a valuation statement.
What Type of Investments Are Being Proposed?
Lenders can treat different investment types very differently. A diversified portfolio of listed investments is not equivalent to a minority holding in a private company or an illiquid private equity fund.
Potentially More Accessible
Cash, deposits, listed shares, authorised funds and professionally managed portfolios may be easier to value and realise, subject to lender policy.
Potentially More Complex
Private company shares, private equity, restricted stock, carried interest, structured products and illiquid funds may require greater scrutiny or be unacceptable.
Relevant questions include:
- Is there a readily identifiable market value?
- How frequently is the asset valued?
- Can it be sold within a predictable period?
- Is the investment concentrated in one company or sector?
- Is it denominated in the same currency as the mortgage?
- Are there lock-ins, notice periods or redemption gates?
- Is the value dependent on an event that may not occur?
- Does the asset produce income that the client already relies upon?
- Is it held within a pension or other wrapper restricting access?
- Would its sale conflict with another financial objective?
Can the Investments Be Accessed When the Mortgage Must Be Repaid?
Current value and future accessibility are separate questions. An asset may be valuable but unavailable at the mortgage maturity date.
The wealth manager should consider:
- the mortgage term and maturity date;
- the client’s age and expected circumstances at maturity;
- withdrawal or redemption notice periods;
- market settlement periods;
- pension-access restrictions;
- fund lock-up periods;
- restrictions attached to employee shares;
- the time required to sell private or unlisted assets;
- currency-conversion requirements; and
- whether the client expects to retain the investments for another purpose.
If the proposed assets cannot realistically be converted to cash when required, their headline value may provide limited support for the mortgage exit.
Are the Assets Already Supporting Another Obligation?
Investment assets should not be presented as freely available without checking whether another lender, beneficiary or commitment has a prior claim.
The portfolio may already be:
- pledged to support a Lombard or securities-backed facility;
- subject to a charge, lien or custody restriction;
- earmarked for an upcoming capital call;
- supporting a guarantee;
- required to meet school fees, tax or retirement expenditure;
- held as a business reserve;
- intended to fund gifts or estate-planning arrangements; or
- relied upon for another property purchase or debt repayment.
Where the portfolio supports existing borrowing, a market fall could trigger a demand for additional collateral or repayment. The same assets should not be counted at full value for several competing purposes without recognising that dependency.
Check the Net Available Position
- Start with the current evidenced portfolio value.
- Deduct existing debt secured against the assets.
- Identify known withdrawals and commitments.
- Allow for potential tax and transaction costs.
- Stress-test market and currency movements.
- Compare the remaining value with the mortgage capital.
What Might the Investments Produce After Tax and Costs?
A lender may begin with gross market value, but the client’s repayment plan should also recognise the amount that might actually be available after realisation.
Relevant deductions could include:
- Capital Gains Tax or other applicable taxes;
- dealing and broker charges;
- fund exit or redemption fees;
- foreign-exchange costs;
- platform or custody charges;
- early withdrawal penalties;
- adviser or professional fees; and
- repayment of debt secured against the assets.
Tax consequences depend on the client, asset, ownership structure and rules applying at the time of disposal. They should be assessed by a suitably qualified tax adviser.
The wealth manager can help identify which assets would be sold and provide relevant cost information, but should avoid presenting an estimated future net value as certain.
Stress-Test the Portfolio Against the Mortgage
A current portfolio value exceeding the mortgage does not establish that the value will remain sufficient throughout the term.
Illustrative Example Only
Assume a client proposes to support a £1.5 million interest-only mortgage with an investment portfolio currently worth £2.5 million.
A 30% market fall would reduce the portfolio to approximately £1.75 million. If £100,000 were then required for tax, transaction costs or another liability, the amount remaining would be approximately £1.65 million.
The remaining margin above the mortgage would be £150,000. A further planned withdrawal of £250,000 would create an apparent shortfall before allowing for any recovery, further decline or change in tax.
The figures are hypothetical and are not an investment forecast or a representation of any lender’s assessment method.
A useful review may test:
- a 10%, 20% and 30% fall in current asset value;
- a larger fall in a concentrated holding;
- adverse currency movements;
- planned and unexpected withdrawals;
- tax and selling costs;
- existing portfolio-backed debt;
- a mortgage term ending during weak market conditions; and
- whether a secondary repayment strategy exists.
The purpose is not to predict investment returns. It is to identify whether the strategy depends on uninterrupted growth or a sale under favourable conditions.
What Evidence Might the Lender Require?
Evidence requirements vary considerably. The lender or mortgage adviser should make the request specific rather than asking the wealth manager to provide a general assurance.
Possible requirements include:
- a recent portfolio or platform statement;
- confirmation of account ownership;
- a breakdown of investment types and current values;
- confirmation of any secured lending or restrictions;
- evidence that the portfolio is professionally managed;
- details of regular contributions or withdrawals;
- information about liquidity or notice periods;
- the currency in which assets are held;
- confirmation of the relevant wrapper or ownership structure; and
- updated evidence if completion is delayed.
Current Barclays intermediary criteria provide one example of how lender policy can operate: for certain existing professionally managed investments, the current evidenced value must be sufficient to cover the interest-only mortgage without relying on future premiums or expected growth. That is an example of one lender’s published approach, not a market-wide rule.
What Should the Wealth Manager Confirm?
Any confirmation should remain factual and within the adviser’s knowledge. It might state:
- who owns the account;
- the valuation date and reported value;
- the broad nature of the holdings;
- whether the portfolio is managed or advised;
- known withdrawals, restrictions or secured facilities; and
- whether the enclosed statement is an accurate record as at its date.
It should not guarantee future value, investment performance, liquidity under all market conditions or the client’s ability to repay the mortgage at maturity.
The adviser can evidence what exists today. The lender must decide whether that evidence supports a credible repayment strategy over the proposed mortgage term.
The Strategy Should Not Be Forgotten After Completion
FCA rules require applicable lenders to review many interest-only repayment strategies during the mortgage term. The purpose is to check that the strategy remains in place and still has potential to repay the capital.
The client’s professional team may also wish to monitor:
- the portfolio value relative to the mortgage balance;
- changes in asset allocation or concentration;
- withdrawals and additional borrowing;
- changes in tax, residency or ownership;
- the remaining mortgage term;
- whether regular capital reductions would improve resilience;
- the continuing suitability of the repayment strategy; and
- the availability of alternative repayment or refinancing routes.
A client should not assume that refinancing at maturity will be available. Age, income, property, rates, lender criteria and regulation may all be different at that point.
Keep the Professional Responsibilities Clear
The Wealth Manager
The wealth manager advises on the portfolio, considers suitability and can provide factual information about ownership, value, investment type, liquidity and known commitments.
Willow Private Finance
Willow assesses lender appetite, mortgage structure, required evidence, affordability, cost and whether the proposed repayment strategy falls within the selected lender’s policy.
The Mortgage Lender
The lender decides whether the repayment strategy is clearly understood, credible and capable of meeting its policy and regulatory requirements.
The Tax and Legal Advisers
The tax and legal advisers assess ownership, tax, trusts, security, disposal consequences and other structural issues outside the mortgage and investment advisers’ respective remits.
When to Involve Willow
An early, anonymous discussion may be worthwhile where:
- the client wants a large interest-only or part-and-part mortgage;
- the repayment strategy involves a managed investment portfolio;
- the assets are held outside the proposed lender;
- the portfolio includes concentrated, restricted or illiquid holdings;
- some investments are already pledged against another facility;
- the assets are held through a trust, company or joint arrangement;
- the portfolio and mortgage are in different currencies;
- the client expects significant withdrawals during the mortgage term;
- a lender has requested confirmation from the wealth manager; or
- the adviser wants to understand likely lender treatment before identifying the client.
The initial outline can remain anonymous. The property value, required mortgage, proposed term, current investment value, broad asset composition, ownership and existing commitments are normally enough to begin testing lender appetite.
Have a Client Proposing Investments as the Repayment Strategy?
Share a high-level, anonymous outline of the mortgage requirement and investment position. Willow can assess relevant lender policies and explain the evidence likely to be required.
Frequently Asked Questions
These answers provide general information. Interest-only criteria and evidence requirements vary between lenders and can change.
Can investments be used to repay an interest-only mortgage?
Potentially. Acceptance depends on the lender’s policy, the type and current value of the investments, ownership, liquidity, evidence and whether the strategy has credible potential to repay the capital.
Can expected investment growth be used in the repayment calculation?
Lender approaches differ, but expected growth should not be treated as guaranteed. Some lender policies require the current evidenced investment value to cover the interest-only balance without relying on future growth.
Must the investments be transferred to the mortgage lender?
Not always. Some lenders may accept evidence of investments held elsewhere, while private-bank or investment-backed facilities may require assets to be held, managed or pledged within the banking relationship.
Does the wealth manager guarantee that the investments will repay the mortgage?
No. A wealth manager may provide factual information and investment advice within their remit, but future values cannot be guaranteed. The mortgage lender decides whether the repayment strategy is acceptable.
What can Willow assess?
Willow can assess lender policy, the mortgage structure, required evidence, costs and whether the proposed repayment strategy is likely to be acceptable. Investment suitability remains with the client’s wealth manager.