Going private can solve your mortgage blues

Borrowers are still being turned down by high street lenders, but there are alternatives.
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The Independent Online

Figures published by the Bank of England on Thursday have revealed that mortgage lenders have cut back on loans, despite pledging to do exactly the opposite. The Bank of England's Credit Conditions Survey reported that after an increase in lending activity in the second quarter of 2009, when banks and building societies made their lending commitments to the Government, lenders then reduced the amount of mortgages they made available between July and September.

The Bank suggests that this situation is likely to change, which has been backed up by an announcement from HSBC this week that it has a set aside £500m to lend to home buyers with deposits of just 10 per cent. But the expectation is that HSBC – like the other main lenders – will pick and choose which borrowers it deals with.

"The problem with HSBC is that it will probably take you a while to get your mortgage application signed off and even then you may be rejected. That's because HSBC is carefully scrutinising all the applications coming in and picking the best borrowers," says Ed Bowsher of lovemoney.com.

In fact, the decline in mortgage lending for the second quarter of the year can be squarely blamed on lenders' increasing their profit margins. According to the Bank of England, lenders unexpectedly widened the differential they charged on mortgages over benchmark rates such as that on two-year interest rate swaps. At the same time, demand for mortgages for house purchases went up, particularly among prime borrowers looking to own a home.

The situation has left thousands of potential borrowers finding it as difficult as ever to get a mortgage through the well-known high-street lenders. But there is a possible solution, say mortgage experts: private banks.

"Private banks are not just the preserve of high net-worth individuals these days," says Michael White, chief executive of online adviser Email Mortgages. "They offer loans starting at around £400,000 to £500,000 and, in general, are able to offer completely different and often much more competitive mortgage deals to the right customer. In the past, people would often pay a premium for this kind of service but this is increasingly not the case."

Melanie Bien, director of independent mortgage broker Savills Private Finance, agrees. "Increasingly, clients are obtaining mortgages from the private banks rather than high-street lenders because they have a willingness to lend that isn't always true of the high street – and you don't necessarily have to pay a premium on the rate."

Forget about any preconceptions you may have about visiting expensive Mayfair offices or dealing with well-spoken bankers speaking in hushed reverential tones to you. You can simply source a mortgage from a private bank through an independent mortgage broker, although that will generally lead on to a meeting with the lender itself.

"For those borrowers – and their numbers are increasing – who have been turned down on the high street, an independent mortgage broker should be their next port of call to try and obtain other sources of funding," advises Drew Wotherspoon of mortgage specialists John Charcol. "Brokers have access to many private banks that the general public, unless they actually bank with them, may not even have heard of, let alone know how to actually get in contact with them.

"Lenders, such as Coutts or Handlesbank, will often look at cases outside of traditional criteria judgements and, indeed, can often offer exceptional deals that would never make their way onto the high street. Brokers have spent many years developing these sources of funding with notoriously publicity-shy banks and, perhaps most importantly, learning how to present a case to them in pristine order, and this route does genuinely offer the best way to obtain alternative funding," he says.

"A broker will know whether you are suitable for private bank lending – not everyone is – and which is the most suitable lender," says Melanie Bien. "Clients with complicated income streams, relying on bonuses and share portfolios, for example, or with considerable assets in property and investments but a relatively low basic salary, may find that high-street banks simply won't give them the mortgage they want. But they can get funding from a private bank. Also, those looking for a larger mortgage – anything above £500,000 – will find the high-street banks may not cater for them at the moment and certainly not at competitive rates."

Oddly, most of the banks of the high street have their own private banking subsidiaries and it may be possible to access their mortgage deals through your own bank. Some also own other private banks, such as Coutts – owned by the Royal Bank of Scotland. But other private banks that a broker may consider approaching to track down a mortgage for you include UBS, Handelsbanken, EFG and Bank of China.

"There is no need to have concerns about the safety of private banks as many of them are divisions of well-known brands such as SG Hambros – owned by Societe Generale – or part of global banking brands such as Standard Chartered or Kleinwort Benson," says Bien.

One drawback with private banks is that it may not be just a simple process of arranging a mortgage. "For private banks, mortgages are a focus for them to entice in and provide a full range of services to high net worth individuals," says Michael White. In other words, you are likely to feel the full weight of the bank's marketing machine as it tries to sell its other services to you.

Indeed, arrange a mortgage with, say, Bank of China through Legal & General Mortgage Club and you'll be invited to an interview at one of the Bank's five UK branches. "The traditional approach to lending involving personal interviews with the lender is an important part of Bank of China's offering," says Thompson. Bien adds: "The private banks want clients with excellent prospects and may insist that you deposit money or place investments with them, although this is not always the case."

However, they can prove to be the answer for some, says White. "We recently had a first-time buyer looking for a mortgage for £500,000 with a 15 per cent deposit (£75,000). But only one high-street lender was interested and offered the client a two-year fixed rate at 5.79 per cent. We were able to place him with a private bank who offered the client more favourable terms at 3.25 per cent fixed for two years."

Surprisingly, the cost of using a private bank may not be any more than a traditional lender, says Bien. "Rates and fees are decided on a case-by-case basis, depending on your circumstances. Borrowing can be arranged on a fixed-rate basis or linked to Bank Base Rate or Libor (London Interbank Offered Rate), depending on the borrower's preference. Multi-currency options may also be available, as well as products with no early repayment charges."

Such flexibility can prove to be attractive, especially for borrowers who have encountered the more rigid lending attitude prevalent at high-street lenders.

Look east: Lender offers another option

Bank of China has been one of the more aggressive private banks in offering mortgages recently. It has linked up with the Legal & General Mortgage Club, which is available through independent financial advisers and brokers.

"Bank of China is the third-biggest bank in the world and has previously only really focused on the Chinese community in Britain," explains Ben Thompson, director of mortgages at L&G. "So linking with L&G is a significant development in the UK mortgage market, and we expect other overseas lenders to get involved in the not-too-distant future."

Bank of China's rates offered through L&G are competitive. They offer lifetime trackers at bank base rate (currently 0.5 per cent) plus 2.5 per cent for residential borrowers, and base rate plus 3.5 per cent for buy-to-let borrowers. Both have a 1 per cent arrangement fee payable up front. It is possible to arrange similar deals with other private banks, depending on your status.

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