April 12, 2019
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Across Instinctif Partners’ Financial Services team, we are always keeping an eye on the key developments taking place across the sector to evaluate their impact on the many businesses we work with. Here we share our picks of the week’s most interesting news, and our expert views.
Pension income falling
Research from Just Group revealed that the average income from workplace pension schemes has fallen since the introduction of pension freedoms, with the average retirement income in 2017/2018 falling to a four year low. This represents a £12 per week decline in comparison to the previous year. (From Pensions Age, 08 April 2019)
London retains global fintech hub spot
London remains Europe’s most popular investment target for venture capitalists as it attracts nearly double the amount of venture capital funding as that of its closest rival. London received 39% of European venture capital funding last year, compared to the 21% received by Berlin, its runner-up. According to data from fintech recruiter Robert Walters and market intelligence firm Vacancy Soft, the rest of the top five cities for VC fintech investment last year were Paris, Stockholm and Barcelona. (From City AM, 08 April 2019)
Charitable wealth management
Following the publication of an industry report commissioned by the Government, a scheme to reallocate dormant assets to charitable projects could be extended to the investment and wealth management sector, as well as to pensions, insurance and securities. The scheme, which is voluntary but currently includes all major UK banks, has seen a total of £600m transferred to charity since its introduction. According to the report, the scheme is to remain voluntary in the future as well. (From City AM, 04 April 2019)
Tackling financial wellbeing
Research by MetLife found that six in 10 (61%) senior HR executives reported a rise in financial wellbeing issues affecting their employees’ mental health. The research also showed that two-in-three HR professionals surveyed said tackling financial stress would help boost productivity and engagement in their organisations. However, the majority (67%) of participants also said they need to know more about the link between financial wellbeing and mental health issues in order to address the issue of financial wellbeing in the workplace. (From Cover Magazine, 08 April 2019)
Ap-peer to lose appeal?
The FCA has issued a warning about peer-to-peer lending, following the collapse of mini-bond firm London Capital & Finance. This comes after some providers launched “innovate finance” ISAs, tax-free accounts for peer-to-peer lending and debt-based crowdfunding, and the FCA is trying to caution investors who may be thwarted by the relative safety an Isa offers into taking out mini-bonds that could see as little as 20% of their money returned. (From The Guardian, 06 April 2019)
Why even Beyoncé puts a mortgage on it
We might expect the financial habits of High-Net Worth (HNW) individuals to be a world away from our own – but in many respects, HNWs engage with similar products and follow the same financial behaviours as those with less cash to spend, particularly when it comes to buying a home. Even mega-star Beyoncé took out a mortgage to afford her $88m Californian mansion with rapper husband Jay-Z. So what are the synergies – and crucial differences – between home-buying HNWs and those with more modest budgets?
Taking out a loan to purchase a house, even if the buyer has enough assets to buy the property outright, is sensible from a practical cash-flow perspective. While for the average homebuyer a mortgage is generally a financial necessity, for HNWs it ensures that precious funds are not tied up in one asset and are instead free to be invested or deployed elsewhere. This is likely why people like Facebook founder Mark Zuckerberg and tech billionaire Elon Musk have ‘mega mortgages’ on their palatial properties.
Today’s low-rate environment is another contributing factor to HNWs opting for home loans. Just like the average homebuyer, they too can benefit from locking into a long-term product and guaranteeing low interest rates on their home loans for the fixed period.
However, being a HNW individual is not necessarily an advantage when it comes to securing a mortgage; recent research suggests many are frustrated with the comparative lack of appropriate products for those with larger assets and in fact struggle to acquire a loan. Nearly four out of five of those surveyed said they believe bank’s criteria for lending is too rigid and 12% reported being turned down for a mortgage in the last five years.
This is perhaps unsurprising considering HNWs’ income structures and the strict lending rules introduced following the Mortgage Market Review (MMR). Launched in 2014 in response to the liberal lending approach unveiled by the 2008 financial crisis, the initiative means mortgages are now tested on a more stringent affordability process which takes into account overall financial health. This is easiest to assess when the borrower is receiving a monthly income of the same amount each month, generally from a full-time job. HNWs very rarely fall into this category, however, having complex income structures that might include erratic self-employed and investment income, on-call or retention payments and occasional bonuses.
HNWs may often seek to borrow against other more unusual collateral, such as other properties, investment portfolios or even a fine art collection.
Clearly a tick-box approach will not work with these types of borrowers, but this is the style of process high street lenders have been encouraged to adopt since MMR came into force. An exemption exists which means HNW customers with a minimum income of £300,000 or net assets of £3m do not need to be subjected to the same MMR conditions, but there is a question mark around if this exemption is being properly used.
Unlike high street lenders, private banks and other specialist lenders can apply more flexibility when assessing a borrower’s ability to repay the loan. As such using a mortgage broker who has access to more specialist providers is an integral part of the home finance journey for HNWs. The same logic arguably applies to typical homebuyers, who will also benefit from considering a wider range of products than just those on the high street.
While for many it may be hard to summon any sympathy for HNW’s mortgage woes, financial services providers who market to this audience must be cognisant of the shared financial goals and behaviours this group have with the rest of their customer base, while also developing strategies to cater to the more unique aspects of their circumstances. A one-size-fits-all approach rarely works with any customer and could be preventing some providers from accessing a lucrative HNW audience.