If you were to ask a group of mortgage professionals what they consider to be the most important factors influencing a mortgage application, it would become immediately apparent that there is no general consensus.
Depending on the lender, everything from income structure to credit and work histories will be taken into consideration. Nonetheless, it is generally agreed upon that the more complicated a case, the higher the chance of a mortgage being denied.
Since the global financial crisis over a decade ago, banks have become noticeably more risk averse. Relying on rigid application structures, many mainstream institutions are not positioned to effectively address the needs of those applicants in unique financial circumstances.
While there is a clear need for effective due diligence to ensure an applicant can take on debt, it seems to be the case that more prospective borrowers are being turned away if they do not neatly meet the application requirements.
An immediate disadvantage
This observation rings particularly true for high net worth individuals (HNWIs). It might come as a revelation, but wealthy and ultra-wealthy individuals often find themselves at an immediate disadvantage when applying for a mortgage.
Generally speaking, the wealthier the individual, the more complicated their income structure is likely to be. Theoretically, this should not serve as a disadvantage if the lender is able to understand the unique needs of a HNWI and create a tailored loan solution. However, this will only occur when the prospective borrower engages with a lender who specialises in prime property mortgages.
The mortgage struggle of HNWIs is not a new phenomenon or a trend instigated by the Covid-19 pandemic.
In reality, it is something that has been around for over a decade. In 2019, Butterfield Mortgages Limited (BML) commissioned a survey among more than 500 HNWIs based in the UK – those with a net-worth in excess of £1 million. At the time, the research revealed that one in nine, or 12% of HNWIs have been turned down for a mortgage in the past decade.
As a consequence of their experiences, 44% told BML they find it inherently difficult to access credit because their capital is tied up in existing real estate investments. Just under four-fifths (38%) also said that they struggle to get mortgages from banks due to the fact they do not receive monthly paycheques.
The BML research caused quite a stir in the property and financial press when released. It demonstrated that even wealthy and ultra-wealthy individuals can immediately find themselves at a disadvantage when seeking a mortgage.
Ultimately, this can dissuade them from considering a property investment opportunity – much of their wealth can be locked up in illiquid assets, meaning they have to rely on the willingness of lenders offering them finance.
The ongoing challenges of HNWIs
Over two years since that BML survey, we wanted to see how the Covid-19 pandemic and subsequent lockdown measures had affected the experiences of HNWIs and property investors applying for a mortgage. To uncover their experiences, it is important to first acknowledge how the property market has adapted to the so-called “new normal.”
When the first nationwide lockdown was announced on 23 March 2020, all sectors of the economy, including real estate, grinded to a halt. The majority of banks decided to no longer accept new applications for different types of debt and removed a large number of products and services from the market.
However, this all changed on 8 July 2020. In what has now been deemed chancellor Rishi Sunak’s mini-budget, a Stamp Duty Land Tax (SDLT) holiday was announced.
This meant that homebuyers could save up to £15,000 on any residential transaction taking place in England and Northern Ireland.
The temporary tax relief has been a success, leading to impressive house price growth and rising transactional activity. Nonetheless, there are concerns that some prospective buyers have not been able to take advantage of the holiday due to the difficulties of successfully receiving a mortgage.
With this in mind, BML once again commissioned a survey of HNWIs to see whether their experiences applying for a mortgage had changed.
It was revealed that one in five (18%) of HNWIs have been turned down for a mortgage in the past 10 years – an increase of 6% from the last BML survey. Over half (51%) of those who have either successfully or unsuccessfully applied for mortgages in the decade told us that they have been rejected at some point.
When exploring the underlying reasons behind these rejection rates, a majority (78%) of the respondents said their banks rely too heavily on “tick box” methods when reviewing mortgage applications. What’s more, 63% also acknowledged that their complicated income structures had resulted in their mortgage application being rejected.
Working with clients to support their needs
Granted, the last two years have been a difficult period for the property market more generally due to general political and economic uncertainty. Just when it looked as though Brexit had finally been resolved and buyers were keen to take advantage of new real estate opportunities, the Covid-19 pandemic posed another round of challenges for all those involved in property. From the perspective of HNWIs, this has meant their chances of being denied a mortgage has increased.
If not properly addressed, there could be significant consequences for banks and the potential exodus of clients to lenders who are willing to work with them to meet their needs. Just under two thirds (62%) of the respondents told BML they have lost faith in their high street bank’s ability to properly and successfully cater to the needs of BTL landlords and property investors more generally.
All this being said, I do not believe the issues raised above cannot be resolved. With the UK slowly transitioning of lockdown, now is an opportune time for the lending market to take a step back and assess how effectively it is dealing with the needs of its clients.
This could range from wealthy individuals right through to first-time homebuyers. Doing so will ensure lenders are better positioned to take on complex cases.
Alpa Bhakta is the CEO of Butterfield Mortgages Limited
