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I confess I felt some schadenfreude last month when the administrators of UK-based mortgage lender Market Financial Solutions (MFS) said that with its collapse and calling in of debts many of its super-prime clients might be forced to sell their London homes.
Five years ago, when I investigated the world of lending for super-prime homes (those worth more than £10mn), I discovered just how cheaply, freely and easily the very wealthy could borrow. Some had multiple mortgages stretching to hundreds of millions. Some mortgages covered the home’s entire value, with rates far below those of high street lenders. It seemed crazy that they could borrow virtually for free and the recent news, therefore, seemed not before time — bringing them back down to earth.
But such mortgages are more widespread — across the wealth brackets — than I at first realised. Those with even a modest investment portfolio with a major wealth manager are also often able to get a so-called Lombard loan — borrowing against shares, bonds or other investments, a practice pioneered by the Italian region’s medieval banking houses — within as little as a few weeks. Private banks such as Coutts, HSBC or Goldman Sachs are happy to oblige.
So, could such asset-backed lending (or Lombard loans) be the key to the house of your dreams? Quite possibly. Coupled with a conventional mortgage, buyers are using it to stretch their budgets. In today’s slow market, when homes are taking longer to sell, such a loan could be used as a bridge — meaning you are able to “buy that house you really want when you haven’t yet sold your own”, says Ann-Marie Atkins, of wealth manager Evelyn Partners. It’s not only UK properties that can be financed this way. A home in Tuscany, or that Alpine chalet that’s just slightly out of reach . . . a nest egg might help fund either one.
Homebuyers are also using a swiftly agreed Lombard loan to put themselves at the front of the queue in negotiations involving multiple bidders or to get an early look at that special home before it comes on to the market, says Hugo Thistlethwayte, ex-head of international residential at Savills, who now runs Occam Advisers, which works with residential developers. “It means you can shop in a certain style and gives you [more] options for off-market or pre-market.”
UK wealth managers including RBC Brewin Dolphin, Evelyn Partners and Quilter Cheviot offer such loans to their clients. Will they approve it faster than a conventional mortgage? “Typically, yes; if you’re the client of a private bank with a high-value share portfolio, they might turn it around in 24 hours,” says Thistlethwayte. “Increasingly, banks are also taking crypto as deposits, but investors also raise loans directly through platforms and exchanges using their existing crypto as deposit, then cashing in the borrowed coins to fund part of a home purchase,” says John Busby, of Traverse International Finance, part of Knight Frank.
Last year, the number of Lombard loans to clients by UK wealth manager Brown Shipley more than doubled. Busby says both enquiries and home purchases involving Lombard loans are increasing across the UK: “Were it not for higher interest rates, demand would be higher still.”
“We have a lot of enquiries currently for loans between £1mn and £3mn,” says Fiona Watts, managing director of International Private Finance, a French mortgage specialist. These are from individuals not quite wealthy enough to interest private banks but with well-sized investment portfolios — “unless they work in finance, most people have no idea this is possible,” says Watts.
Wherever you might be based, a few things are worth bearing in mind. “Don’t just go for the cheapest headline rate,” says Paul Welch of Million Plus, a broker for high-value mortgages and Lombard loans. Private banks can make eye-catching offers, but they might expect something in return — typically management of the investment portfolio that is backing the loan, charging fees that could add up to more than you are saving, he explains.
“Borrowing in a currency that’s different to the home you’re buying is a big currency risk,” adds Watts. It’s tempting to finance that French ski chalet with a loan from a Swiss lender, where the central bank interest rate is still 0 per cent. But fond memories from 10 years of family skiing holidays will soon tarnish if the euro gains against the Swiss franc and you find yourself owing more than the home is worth.
Finally, says Busby, do your due diligence on the lender, including checking they actually have the money they’re offering to lend: some might borrow it from another institution, he emphasises. The last thing you’d want is to pick the next MFS, then end up the subject of your friends’ schadenfreude.
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