Top-end loans: Millionaires and mortgages

The market for super-rich homes is on the increase, but can lenders keep pace?

The latest Government figures on the housing market suggest that prices rose more sharply last month than many observers expected. But the modest overall increase masks part of the market that is busier than it has been since 2001: the market for homes costing several million pounds.

Interest in the top end of the housing market is being boosted by the prospect of a generous bonus in the City, to be announced in the next few weeks. Much of the money is expected to go towards prime properties in London and the South East, as well as large country properties. But even the very wealthy may need to borrow money, and brokers are reporting a surge in applications for million-pound-plus mortgages.

"Bonus money is being spent on property," says Mark Harris, the managing director at brokers Savills Private Finance. "Someone with a bonus of £1m doesn't buy a property for £1m, but for £4m. You want the property that is just out of reach."

Nonetheless, the idea of buying a multi-million-pound property and funding a large part of the purchase through a mortgage is not the outlandish proposition it might have seemed a few years ago. But the lending market might not be keeping pace.

Some lenders are actively going after very large loans. Cheltenham and Gloucester, for example, has a mortgage fixed at 4.69 per cent until November 2008, with a minimum loan size of £1.5m. Given that the maximum loan to value on this mortgage is 90 per cent, the cheapest property Cheltenham and Gloucester will fund is £1.66m. The problem buyers of expensive properties will face is that, as their budgets increase, so the choice of lender narrows. For loans of £750,000, there are a dozen or so mainstream lenders. Move over the £1m mark and the number falls to seven or eight.

"You find that many of the building societies will stop lending at £500,000," says Harris. "The larger ones will lend up to £1m, but then it becomes the territory of the specialist lenders and the banks. The magic £1m figure has probably not been reviewed for 10 years. We are not seeing thousands of deals above £1m, but we are seeing more and more of them in London and the South East."

As most borrowers looking for very large loans are also putting down a sizeable deposit, it is still possible to find competitive interest rates. Paul Hearnden, of financial advisers Hearnden Associates, points out that most buyers of expensive homes have a deposit to put down of between 15 and 30 per cent. Even for a loan of over £1m, it is possible to find a tracker mortgage with a rate of 3.75 per cent.

But at the top end of the market, the interest rate is not the only factor that matters. City workers in particular can have irregular incomes, with a basic salary of £200,000 to £400,000, but with large bonuses on top. As a result, mortgages with the flexibility to make overpayments are important. "Over two to three years, many of these buyers are in a position to drastically reduce their mortgages," says Hearnden. "They want to make large overpayments, and they won't worry so much if that penalises them on rates."

Buyers at the top end of the property market might have other income streams, such as money from overseas, equities or share options. They may well borrow now, because it is cost-effective, but pay off some or all of the loan from other assets if interest rates rise. This makes fixed-rate mortgages less attractive.

And there is evidence that such buyers, especially in London, are borrowing money in order to buy now ahead of a possible bonus-driven price hike. "People in the City don't know what bonuses they will be getting yet, but they have a pretty good idea," says Harris. "That is giving them the confidence to look at properties now."

Much of the money is destined for the most upmarket parts of London, with older buyers more likely to look at country properties. Given the relative scarcity of top-end homes in these areas, the number of buyers borrowing £1m or more can only grow.