Problems with affordability
HNW and UHNW clients often have complex income structures, such as:
- dividends;
- directors loan repayments;
- partnership distributions;
- carry;
- management and performance fees;
- interest;
- rental income;
- disposals;
- royalties;
- commissions;
- long-term incentive plans; and
- fixed and variable allowances.
Mainstream lenders' products and processes are set up for the majority, most able to assess income through PAYE employment, with even well-documented self-employed people or business owners typically having fewer lending providers to choose from.
This is especially problematic for entrepreneurs whose businesses are in a growth mode, for example.
These businesses may have minimal profits or even losses, meaning emphasis must shift to alternative methods of demonstrating the serviceability of any debt facility.
For HNW and UHNW clients, this is further complicated by their mixed income sources, often with a cross-border and multi-currency element to the case.
This can lead to the highly wealthy encountering affordability issues, where they may even fail to pass a lenders' strict affordability policy to support the lending.
This is sub-optimal for both the HNW and UHNW client group, as much as it is for the lending providers themselves.
One method to overcome this is the HNW exemption, which certain lenders apply to these types of lending applications.
When a client is classified as HNW – qualifying criteria of £300,000 net income and/or £3mn net assets – you can work with lenders, which accept the exception, to look at the client's wider asset base.
This can demonstrate further liquidity and potential income by notionally ‘slicing’ assets over the term of the proposed facility.
Each bank has its own criteria with regard to these assets and how they can be used to evidence affordability, and it does help to have long-term experience in banking and HNW/UHNW brokerage so you can swiftly work with a collection of hand-picked lenders to ensure you get the right end result for the client.
This is hugely assisted by an ability to work with the client’s professional advisers to articulate the underlying personal asset and liability position, along with any company, trust or foundation assets/income can be attributed to them.
When it comes to helping HNW and UHNW clients, it is not about working with just the client – it is a team effort to ensure they end up with the best outcome.
Lack of ‘dry lending’ options
Particularly in the international space, banks will look for a client’s assets under management to sit alongside the debt for extra protection, access to liquidity and to have a deeper relationship with the underlying client.
In some instances, this can work well for a client and provide them access to lower borrowing rates and preferential terms.
However, when the client’s ask is to borrow, naturally, they may not have the additional liquidity many lenders will require.
