Regulators have agreed to change mortgage affordability rules for high net worth borrowers that put a cap on how much they could borrow regardless of their wealth.
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Under new lending rules set out by the Bank of England, the maximum loan-to-income borrowing was set at a maximum of 4.5 times income on just 15% of lending a year, which severely limited the chances of a wealthy home buyer raising a mortgage.
This is because specialist lenders dealing with high net worth clients often consider security against their other assets rather than their incomes when agreeing a mortgage.
However, the new mortgage affordability rules prevented them from deciding a case based on the customer’s net worth and limited them to lending based on their income, which in many cases does not include interest or dividends from significant investments.
High net worth mortgages
After please from lenders, the Prudential Regulation Authority (PRA), the body in charge of enforcing compliance of the new rules, has relented and rewritten how lenders can work with high net worth borrowers.
In most cases, a high net worth borrower would have cash and investments in excess of £1 million.
Many of the specialist lenders would arrange fewer than 100 or so mortgages for wealthy clients each year and trade body the Council of Mortgage Lenders (CML) urged the PRA to reconsider as the new rules would decimate their businesses.
As a result, the PRA will now let small lenders who advance less than £100 million a year to fewer than 300 customers carry on business as normal and ignore the new rules.
The CML argued that small lenders often considered assets as well as income for wealthy borrowers, and although a mortgage might have a high loan to income ratio, because security was taken over other assets, the size of the loan did not represent a financial risk to the lender or borrower.
“Private bankers generally have a broader understanding of their customers’ financial affairs than a high street lender,” said a CML spokesman.
“A mortgage for a wealthy customer is often a custom product and designed around their personal needs and decisions about their portfolio. Because they are less likely to be affected by income rate changes, affordability is rarely a consideration.”
Welcoming the PRA’s decision, the CML spokesman went on to add that the ruling will help many small lenders stay in business.
“Changing the rules is practical and sensible, while retaining opportunities for customers in what is really a niche private banking market,” said the spokesman.
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