Since the high street banks took a step back, in light of the 2008 US mortgage crisis, private banks have taken a step forward. As we have mentioned in previous articles, there is a misconception that private banks are content to take on more risky transactions when this is not necessarily the case. So, why are private banks so keen to provide attractive mortgage rates?
Short term strategies can prove fatal
Many people believe that the traditional UK banking sector is dominated by short-term policies with a lack of focus on the longer term. As we saw with Northern Rock, which literally collapsed after the 2008 US mortgage crisis, funding mortgages with money market liquidity was in hindsight a seriously risky strategy. As money market rates increased in light of the financial crisis so Northern Rock was unable to refinance debt, unable to provide mortgage finance at affordable rates and ultimately imploded.
It is difficult to associate private banks with the same short-term strategies used by Northern Rock. The simple fact is that many private banks will provide competitive mortgage rates, not necessarily more risky mortgage agreements, while also encouraging the transfer of assets to their asset management division. In reality mortgage interest rates are heavily influenced by not only income streams but also the level of security available – in this case assets under management.
Using assets under management
When providing finance for high net worth individuals, many private banks will insist on the transfer of certain investments to their asset management division. In effect this transfer is an insurance policy against the mortgage capital and will remain under the control of the private bank while the mortgage is live. The customer will still receive the income and capital gains from their asset management investments. Indeed, many clients will use these additional funds to cover interest charges on their private banking mortgage arrangements.
A win-win situation
In many ways this is a win-win situation, private banks have the insurance of transferred assets under management in the event of problems with the customer’s future mortgage payments. The customer is able to introduce significant security to the mix which allows the private bank to offer a competitive mortgage rate. It is also worth noting that private banks are not limited to the traditional banking affordability calculations for mortgage funding. Due to the way in which private banks (and also niche lenders) are funded they have much more control over the assets and income streams they can consider when assessing affordability.
Filling the gap
It does seem as though private banks are filling the vacuum left by high street banks which were effectively forced to reduce their risk profile and concentrate on what are known as “vanilla” mortgages. These are relatively straightforward, affordable mortgages where there is ample income and security to cover the capital outlay. However, we live in a world where finances are becoming more and more complicated often leaving high street banks behind.
The transfer of assets under management to a private bank offering an attractive mortgage rate can, if structured correctly, be a win-win for both parties. The customer gets a very competitive mortgage interest rate, as well as future income from investments, while the private bank has a rock solid insurance policy against any future mortgage default. It is also very useful for private banks quoting their assets under management when pitching for new business.