Private mortgages for high-net-worth business owners
In this guide we will explore what private mortgages are, the benefits of this type of borrowing as well as the process of obtaining a private mortgage.
What is a private mortgage and how does it work?
Private mortgages used to refer to borrowing through lenders that were only available to certain customers such as those with a high net worth.
However, times have changed and these days accessibility to private lenders is easier through certain routes.
Private lenders generally have more flexibility with their approach to assessing potential borrowers and therefore can review applicants on a case-by-case basis rather than against strict criteria like a high street lender.
Many private banks use a different system when underwriting mortgage applications to establish the associated risks, known as the ‘Assets Under Management process.
This process takes into account a wider range of personal circumstances such as future inheritance and income streams, rather than simply the applicant’s current income and affordability like high street lenders.
This approach can result in a more specific offer suited to the applicant’s requirements and can allow for some negotiations; however, it is worth noting that private lenders are looking to build a long-standing relation with their clients, rather than the high street market where these days loyalty is rarely rewarded.
What are the advantages and disadvantages of private mortgages?
Opting for a mortgage from a private lender will have a range of benefits, however there are also some disadvantages and therefore it is highly advisable that potential borrowers fully investigate private mortgages before proceeding.
Here is a summary of Advantages and Disadvantages of Private Mortgages:
|Advantages of private mortgages||Disadvantage of private mortgages|
|· Flexible criteria – Private lenders can take a more tailored approach to assessing a mortgage application including income and the expected growth or future income. Private lenders are also more open to taking commission, bonuses, or multiple income streams into account with calculating current total annual income which can help with affordability. In addition, private lenders sometimes consider accepting high value items such as cars or watches as collateral into account along with deposit values.
· Would review an application with someone with bad credit – As long as an applicant meets the private banking criteria with the lender, they may be considered for a mortgage even with a bad credit score or history, due to the flexibility with lending criteria offered by private lenders
· Wider product range – In addition to having more flexibility with borrowing criteria, private lenders can also offer a wider product range in the form of bespoke lending, for those unique circumstances where high street lending would not be applicable. Private lenders commonly higher value mortgages, increased loan to value as well as interest only, commercial mortgage and buy-to-let mortgages.
· Preferrable rates – Private lenders often can offer better interest rates and terms in comparison with high street lenders which can save the potential home buyer money.
· Premium service – Private lenders offer a different level of service to competitors, including a more personal approach.
|· Accessibility – Although private lenders are opening up to a wider range of clients, potential clients cannot simply approach private lenders. There may be eligibility criteria or invitation-only access and therefore further research may be required.
· Less straightforward – Due to the bespoke service offered by private lenders, there is less transparency of the process. Due to this reason, the use of a mortgage broker who has built up relationships with private lenders can be invaluable, providing information on the accessibility criteria and the processes used to access applications.
· Higher fees – It is common for private lenders to charge fees to access and use their services. The fees will vary between lenders however they are justified due to the benefit of the higher level of service provided.
Private family mortgages
Another type of private mortgage is that provided from an individual who would not usually loan money, such as a family member.
Inter-family lending is less common in the UK than conventional, standard lending however the terms can be more favourable than those offered by banks or building societies.
Although it must be noted that should there be a disagreement with the loan or repayments, family relationships can suffer.
The formality of such an arrangement may wish to be considered before proceeding, even seeking legal advice to ensure the interests of all parties are documented before any loan is commenced.
Another method of enabling inter-family lending can be with the utilisation of equity release mortgage products that provide the owned equity within a property to be withdrawn, which in turn can create a cash fund that can be used to help a family member for example.
With that said, they are not to be used for new developments, in which case a construction loan is more appropriate.
What is the process of setting up a private mortgage?
As briefly mentioned, the process of obtaining a private mortgage will vary between lenders, including the eligibility criteria to approach a private lender.
The process is less of a box ticking exercise as completed by high street lenders for standard mortgages and therefore complexities can arise, therefore the support of a broker can be invaluable.
Do high-street lenders offer private banking?
Over the years, high street lenders have expanded into the market of private banking and there are now a few options including NatWest Premier, HSBC Private Banking and Club Lloyds Private Banking, and each will have varying edibility requirements to be able to benefit from their private services.
Mortgage brokers are best placed to be able to advise on private lenders, their criteria and accessibility as well as comparing various exclusive offerings in order to find the most favourable deal for your personal circumstances.
Private mortgages Summary
Private mortgages are more accessible through mortgage brokers and therefore it is highly recommended that the support of a broker is sought especially if your circumstances are unique and could benefit from a bespoke review.
Brokers have built up relationships with private lenders and therefore can assist with the introduction and connection if appropriate after a review of a potential applicant’s personal circumstances.
In addition, due to the differences of mortgage terms offered by private brokers, the support offered by mortgage brokers is essential to ensure the terms are fair, reasonable, and competitive.