The MMR outlines a number of specific proposals concerning HNW borrowers including:
Proposing an alternative approach to HNW because of the complex nature of income and the short terms of most loans (typically five years).
Suggesting the FSA could either disapply the mortgage rules to HNW borrowers or allow them to forego the protection of the mortgage rules.
A definition of what constitutes HNW. As its starting point it suggests a gross income of no less than £1m pa or net assets of no less than £3m.
Lenders would need to get a declaration from a professional (lawyer, accountant) that states the individual meets this definition.
For HNW borrowers, affordability can be assessed on an interest-only basis providing there is a realistic and credible strategy for repaying the capital.
Enness believe the FSA has, for the most part, produced a balanced and coherent set of proposals for the HNW borrower.
It says that disapplying the standard mortgage rules for HNW makes perfect sense. It also believes that borrowers, who are able to evidence or in many cases deposit with the lending bank large amounts of assets and investments, should be shown more favourable lending terms than those individuals relying on income alone.
Enness however believe the definition of HNW as stated by the FSA is slightly high. It cites the Consumer Credit Act where there is a clause for unregulated lending which states that the borrower can forego the benefit and protection of the Act as long as they are deemed HNW.
In the CCA this is deemed to mean £150k pa of income or £500k of net assets. Enness acknowledge that the CCA amounts may be slightly small for the purposes of large mortgages but would like to see the FSA definition move to become more in line with this.
Hugh Wade-Jones, Director of Enness Private Clients, commented:
“We are in full support of much of what the FSA is trying to achieve with the MMR, in particular its proposals to effectively allow HNW customers an ‘opt-out’ when it comes to its more stringent rules around affordability proof and utilising interest-only.
"Given the nature of many HNW individuals’ income and assets we have to treat these separately.
"We are certainly not advocating lending to individuals without any income but if we have someone whom, under normal mortgage rules, has a non-standard income yet can put down five years’ worth of mortgage payments on account on day one, then we believe they should be viewed as an equally secure lending prospect as someone borrowing on the back of their income alone.
“The proposals for HNW clients on interest-only also make perfect sense. The high-street lenders’ obsession with loans over £500k being on a capital and repayment basis has got out of hand and is a little confused.
"Individuals who fall into the HNW bracket will often have non-standard income structures and as such they may not want to be forced to commit to large monthly payments particularly when they may have large amounts of investments or stock maturing in a few years’ time which will be used to clear some or all of the debt.
“We work with a variety of private lender banks that offer loans on a five-year term, which would obviously mean that the standard check of whether a mortgage is affordable on a capital and repayment basis is nonsense.
"In the land of 25-year terms, the five-year product might seem restrictive however we believe it should become more widespread as it allows for more regular reviews of the borrowers’ circumstances, rather than leaving them to it for a quarter of a century.
“All in all the proposals in this area would be welcome for the HNW sector. We do believe the definition of HNW is a little high at present and could be more in line with the CCA unregulated lending rules although we see the thinking behind higher income and asset benchmarks for mortgage lending.
"If the FSA were to review these amounts then we believe this would provide further help for the HNW sector.
“However, overall we are in broad support of the MMR. It is our intention therefore to support this consultation paper and we look forward to the proposals being written into the final rules later in 2012.”
