Mortgage without selling portfolio

[sss555sss]

Hi,

I've got a bit of savings in an ISA. Right now, most of this is cash. Over the past month I've made a few investments. I've invested about 20% of the cash. I've been wanting to buy a property (first property) for a while. The 80% of cash in my portfolio will allow me to put a 25% deposit on a property without having to liquidate any of my holdings. When I apply for a mortgage, surely they will take into account the extra capital I have even though I have not put it into the house? If it's not automatic, can this be included in the mortgage (e.g. if I fail to pay, they can receive my holdings)?

My reasoning is this. In a hypothetical situation, I'm buying a house for £100,000 and put down £20,000 deposit and based on my salary I get £80,000 mortgage at interest rate r. If I also have a diversified portfolio currently valued at £30,000 with a fair value estimate of say £50,000 then surely I am a lower risk to the lender than if I didn't have the £30,000 portfolio. Then I should be able to get a discount on the rate - otherwise it's kind of theft if they give me a higher rate when I'm clearly lower risk due to the larger capital reserves.

To be clear, I am talking about a mortgage that I would be approved for without having the extra capital. However, superimposing the extra capital, the interest rate should be reduced?

[dealtn]

However, superimposing the extra capital, the interest rate should be reduced?

Good luck with that.

Assuming you're talking about normal High Street banks, which to be frank given the sums you are describing, is what I conclude.

At best you will possibly get a small allowance in the calculation for the income from the equity portfolio, but a lower multiple than earned income.

Back before the financial crisis there was much more flexibility, and willingness on behalf of banks, to accommodate "unusual" situations (that weren't in fact that unusual), but now that scope is much more limited. You will be offered, in general, much more "off the shelf" than "bespoke" products. Even then bespoke requires more intervention in terms of monitoring, than standalone, so the incentive, and ability to discount a rate just isn't there, particularly for situations where the bank's risk isn't meaningfully reduced. You will also have to pay extra costs for deeds of pledge over the security you are proposing to offer the lender (or were you expecting this to be unsecured?).

Furthermore the "less standard" products, and lending (or asset in balance sheet terminology), will have more expensive capital treatment from the bank's perspective in the way it is measured and charged by the financial regulators. One of the side-effects of the way the financial system is now regulated, and the economy "protected", is that competition has decreased, and innovation stymied.

In short you are seeking a cost reduction where it can't really be justified by the lender you asking it of. The post financial crisis world doesn't (yet?) work in the way you want it to.

[AsleepInYorkshire]

Hi,

I've got a bit of savings in an ISA. Right now, most of this is cash. Over the past month I've made a few investments. I've invested about 20% of the cash. I've been wanting to buy a property (first property) for a while. The 80% of cash in my portfolio will allow me to put a 25% deposit on a property without having to liquidate any of my holdings. When I apply for a mortgage,

Amendment 1 - remove the word "mortgage" and insert the word "debt".

surely they will take into account the extra capital I have even though I have not put it into the house?

Amendment 2 - remove the word "surely" and insert the words "surely not"

If it's not automatic, can this be included in the mortgage (e.g. if I fail to pay, they can receive my holdings)?

Amendment 3 - remove the word "can this" and insert the words "this cannot"

My reasoning is this. In a hypothetical situation, I'm buying a house for £100,000 and put down £20,000 deposit and based on my salary I get £80,000 mortgage at interest rate r. If I also have a diversified portfolio currently valued at £30,000 with a fair value estimate of say £50,000 then surely I am a lower risk to the lender than if I didn't have the £30,000 portfolio. Then I should be able to get a discount on the rate - otherwise it's kind of theft if they give me a higher rate when I'm clearly lower risk due to the larger capital reserves.

To be clear, I am talking about a mortgage that I would be approved for without having the extra capital. However, superimposing the extra capital, the interest rate should be reduced?

Let me be candid please. I think you've used some strong language (otherwise it's kind of theft) in a bid to either convince yourself or perhaps other members of the community that your argument holds water. Your argument that you have more capital "reserves" is self defeating. If you have the capital reserves why not use that yourself?

However, why not give it a try? You just may have an excellent point and the bank may support you.

AiYn'U

[Alaric]

If you have the capital reserves why not use that yourself?

Twenty five years ago, lenders would accept capital reserves in the form of endowment assurance policies. Thirty five years ago, many lenders seemed convinced that repayment of the mortgage at the end of the term using the lump sum from an endowment was a far better method than chipping away at the debt month by month.

Part of the old system was that the policies could be assigned to the lender. I don't think that's possible with ISAs.

[sss555sss]

This is insane. So I own a portfolio of shares. It boggles my mind that earnings from my job are the primary factor on my mortgage when (a) I can leave my job any time or (b) I can get fired or (c) my employer can go bankrupt or (d) I can get hit by a bus. How can capital already in possession not carry any weight on a mortgage application? Shares are pieces of (UK) businesses. We aren't talking about valuing my shoe collection and putting this into the mortgage agreement - it's pieces of businesses with a certain value. Even if you discount the portfolio @ 50% (which is less than the drawdown followed by the current meltdown we just experienced) it's still something to take into account.

[ReformedCharacter]

This is insane.

I think you're making the mistake of expecting rational behaviour where none exists.

RC

[dealtn]

This is insane. So I own a portfolio of shares. It boggles my mind that earnings from my job are the primary factor on my mortgage when (a) I can leave my job any time or (b) I can get fired or (c) my employer can go bankrupt or (d) I can get hit by a bus. How can capital already in possession not carry any weight on a mortgage application? Shares are pieces of (UK) businesses. We aren't talking about valuing my shoe collection and putting this into the mortgage agreement - it's pieces of businesses with a certain value. Even if you discount the portfolio @ 50% (which is less than the drawdown followed by the current meltdown we just experienced) it's still something to take into account.

As I said earlier, the income from that portfolio may be a factor in how much you are able to borrow, so the capital can be, and is in some circumstances, taken into account.

As someone else has stated, if you want your capital to be taken into account, then the easiest method is to use it yourself directly.

Alternatively don't expect the mortgage provider to utilise the capital and lend against it, and use it as security. This isn't the principal activity of such an institution. They provide mortgage debt against the security of the underlying property asset and serviced from earned income. Go to an alternative provider and borrow from them against your equity portfolio, and use that debt as capital.

There are providers of finance who will look at your assets and liabilities as an aggregated portfolio, but if I am honest the sums of money you are talking about are, by a long distance, too low for this kind of thing.

This isn't insane this is normal financial business in the real world.

[Spet0789]

As others have said, you’re being unrealistic, bordering on naive.

Unless you are borrowing a couple of million quid or more, you’re shopping in George by Asda, not Savile Row. That being the case, the banks aren’t going to make up a new way of risk-assessing your mortgage and assigning regulatory capital on it just for you.

Yes, you can borrow against Equities, but that is with variable margin. That’s a huge difference. Even if the bank can take effective security over your stocks, that’s very different from what you get with a mortgage. On a margin loan, if you get into (or anywhere near) negative equity, the bank will sell your collateral from under you. That obviously doesn’t ever happen on a mortgage.

Even if you went to Hoare and Co or another private bank, you’d probably pay 1% more in interest for your fancy bespoke mortgage than for a high street loan.

You have three options:
1) Sell up and use the cash as equity.
2) Move you portfolio to a broker who offers margin lending and release some equity there by borrowing on margin. Be careful. You may blow up.
3) Do 1) and then replace your exposure with CFDs or spread bets. Again, you may blow up.

[Alaric]

You have three options:

Is there a fourth option? Borrow partly on an interest only basis on the grounds that the portfolio can be liquidated to pay off the mortgage.

[Lootman]

You have three options:

Is there a fourth option? Borrow partly on an interest only basis on the grounds that the portfolio can be liquidated to pay off the mortgage.

Back in the 1990s I took out an interest-only mortgage with the Woolwich. I had to show them a statement for my ISA which, at the time, was worth less than the amount I was borrowing. The idea was that after the 25 year term of the mortgage, the loan would be paid off by the (by then) greatly increased value of the ISA.

That said I did not have to pledge or hypothecate the ISA to the Woolwich as collateral which, in any event, is probably not legally possible. In the event of a default the Woolwich would have the first charge on the property, which is a far superior form of protection for them.

As a lender I would take no account of someone's shareholdings for the simple reason that the borrower could sell them off the day after the loan is given, and fritter it all away on wine, women and song. They would have to be placed in escrow for them to have any borrowing power at all.

[Spet0789]

You have three options:

Is there a fourth option? Borrow partly on an interest only basis on the grounds that the portfolio can be liquidated to pay off the mortgage.

Don’t see how that helps. The issue the OP has is LTV not interest cover.

[Gerry557]

Whilst I understand where you are coming from and have been in the same situation. The lenders have their own rules which you have to agree too. Just like loosing your job, your shares can cut dividends and or become worthless. Often the staff are running through a scrip to tick boxes and you and my "out of the box situation" isn't in the script.

In my case they asked if they were UK shares? . They were not happy with any Asian funds paying in UK currency but were happy with Vodafone even though it pays in euros and is now mainly none UK but at least it has a UK HQ and the girl doing the application had heard of them.

In my case I wanted to keep my offset mortgage that was fully funded and my portfolio was worth substantially more than the mortgage as well. They did question why I even bothered. The sticking point became how I would repay. I didn't seem "concerned enough" apparently but eventually ticked the box after answering that in worst case, I would sell the house to repay! . Owning other property also didn't count. So in my case the risk was virtually nil but I was still asking and they have to assess their risk.

Loan to value, earnings to size seem to be the main drivers. Interest only seems to be frowned upon although becoming less so. How to repay and what vehicle can be taken into account.

Unfortunately you are where you are and they are free not to accept you. Put another way would you lend to me? Cos I definitely wouldn't lend to you, no offence.

If you want to play their game you have to accept their rules however unfair you think they are. You have options available to you within that scope.

[Lootman]

Loan to value, earnings to size seem to be the main drivers. Interest only seems to be frowned upon although becoming less so. How to repay and what vehicle can be taken into account.

Yes, surely the two issues are the size of the loan relative to both the borrower's earnings and the value of the collateral i.e. the property. If the borrower defaults then the lender can seize the property. Moreover the borrower cannot sell the property without the lender's permission, and that lender will be paid off first.

And therein lies the problem with the OP's auxiliary asset - the shares. Not only can they go to zero, as you note. But the bigger problem is that, unlike with the house being bought, the lender has no control over the shares. The borrower is free to sell them at any time. As such, it is near useless collateral. If a deal is to be made involving the shares, then those shares must be held in some kind of segregated account that the lender can monitor and restrict. Otherwise this is just an unsecured loan, which of course carry much higher rates.

[sss555sss]

Loan to value, earnings to size seem to be the main drivers. Interest only seems to be frowned upon although becoming less so. How to repay and what vehicle can be taken into account.

Yes, surely the two issues are the size of the loan relative to both the borrower's earnings and the value of the collateral i.e. the property. If the borrower defaults then the lender can seize the property. Moreover the borrower cannot sell the property without the lender's permission, and that lender will be paid off first.

And therein lies the problem with the OP's auxiliary asset - the shares. Not only can they go to zero, as you note. But the bigger problem is that, unlike with the house being bought, the lender has no control over the shares. The borrower is free to sell them at any time. As such, it is near useless collateral. If a deal is to be made involving the shares, then those shares must be held in some kind of segregated account that the lender can monitor and restrict. Otherwise this is just an unsecured loan, which of course carry much higher rates.

Thanks, it's a good answer. Just because lenders don't do it, it does not mean it doesn't make sense. Australians are paying a fee every time they do a bank transfer or use an ATM. Some countries charge every time you pay with a card. Just because something is the way it is, it doesn't mean it makes sense - just means you're being ripped off.

Let's look at the situation. We have 2 blokes with exactly the same job, income and desire to buy exactly the same property. Each puts down a £20k deposit for a £100k house and wants to borrow £80k. Each has a £30k/year income. However, one also has a portfolio currently worth £50k paying £1k dividends and the other one has no more capital. If you had to lend to one of them, who would you lend to? I sure am going to pick the guy with the extra £50k and £1k of income even if the portfolio paid no dividend. If he lost his job tomorrow, he can sell off parts of the portfolio and still make payments.

You said If the borrower defaults then the lender can seize the property. - so how is having extra capital not a factor in the probability of a default? The answer is it does reduce the probability of default and if a lender tells you otherwise you are being ripped off. Unless we live in a world where defaulting on your mortgage as as much implications as selling a stock, most people will do anything to pay their off mortgage and not default so extra capital makes this person far less risky to a lender. If tomorrow you had to choose between defaulting on your mortgage or selling 100 shares of vodafone and paying your mortgage, you sell 100 shares of vodafone.

The idea of shares can go down is simplistic. Mortgages go to 0 over a 20 year period. Over the same period, a portfolio will tend to go up. That is, if you hold a portfolio of companies, every year you become less and less risky to the lender because the mortgage debt relative to the portfolio value will tend to decrease to 0.

[Gerry557]

You might lend to the portfolio chap as it supports your argument.

The normal lenders won't and its them that matter. There are several life style questions so it might be more to to with how you spend it rather than how you earn it.

There are lots of other questions that form an opinion on your suitability. Your newly acquired shares might have appeared as part of a loan from a family member. Cash is also investigated to see where its come from, again to see if its some sort of loan.

After the financial crash the rules were tightened but some we interpreted much harder hence people missing out for having too many hair dos.

Hopefully a better balance will be found and interest only resumed as it can work for most but regulators plan for the idiots not intelligent customers.

A mortgage broker might find some who will listen but then you appear to have found the product you want but appear to be grumbling about their rules.

[sss555sss]

You might lend to the portfolio chap as it supports your argument.

The normal lenders won't and its them that matter. There are several life style questions so it might be more to to with how you spend it rather than how you earn it.

There are lots of other questions that form an opinion on your suitability. Your newly acquired shares might have appeared as part of a loan from a family member. Cash is also investigated to see where its come from, again to see if its some sort of loan.

After the financial crash the rules were tightened but some we interpreted much harder hence people missing out for having too many hair dos.

Hopefully a better balance will be found and interest only resumed as it can work for most but regulators plan for the idiots not intelligent customers.

A mortgage broker might find some who will listen but then you appear to have found the product you want but appear to be grumbling about their rules.

Sorry, I don't mean to come across as grumbling. Most of us here are savers and generally financially sensible people so it is disturbing that the whole picture isn't taken into account. Its not details either - taking into account sizeable capital should have at least a bit of an impact.

[vagrantbrain]

Nothing really disturbing about it - your capital is worth nothing to the lender as they can't use it as security for the loan and have no control over what happens to it. They can't stop you spending it or investing in penny stocks and losing the lot so it makes no difference whatsoever to the risk level that you present to them. It may seem daft to you but your individual mortgage is worth very little to a lender in the grand scheme of things so anything outside their sausage machine process is just not worth the effort.

[dealtn]

Loan to value, earnings to size seem to be the main drivers. Interest only seems to be frowned upon although becoming less so. How to repay and what vehicle can be taken into account.

Yes, surely the two issues are the size of the loan relative to both the borrower's earnings and the value of the collateral i.e. the property. If the borrower defaults then the lender can seize the property. Moreover the borrower cannot sell the property without the lender's permission, and that lender will be paid off first.

And therein lies the problem with the OP's auxiliary asset - the shares. Not only can they go to zero, as you note. But the bigger problem is that, unlike with the house being bought, the lender has no control over the shares. The borrower is free to sell them at any time. As such, it is near useless collateral. If a deal is to be made involving the shares, then those shares must be held in some kind of segregated account that the lender can monitor and restrict. Otherwise this is just an unsecured loan, which of course carry much higher rates.

Thanks, it's a good answer. Just because lenders don't do it, it does not mean it doesn't make sense. Australians are paying a fee every time they do a bank transfer or use an ATM. Some countries charge every time you pay with a card. Just because something is the way it is, it doesn't mean it makes sense - just means you're being ripped off.

Let's look at the situation. We have 2 blokes with exactly the same job, income and desire to buy exactly the same property. Each puts down a £20k deposit for a £100k house and wants to borrow £80k. Each has a £30k/year income. However, one also has a portfolio currently worth £50k paying £1k dividends and the other one has no more capital. If you had to lend to one of them, who would you lend to? I sure am going to pick the guy with the extra £50k and £1k of income even if the portfolio paid no dividend. If he lost his job tomorrow, he can sell off parts of the portfolio and still make payments.

You said If the borrower defaults then the lender can seize the property. - so how is having extra capital not a factor in the probability of a default? The answer is it does reduce the probability of default and if a lender tells you otherwise you are being ripped off. Unless we live in a world where defaulting on your mortgage as as much implications as selling a stock, most people will do anything to pay their off mortgage and not default so extra capital makes this person far less risky to a lender. If tomorrow you had to choose between defaulting on your mortgage or selling 100 shares of vodafone and paying your mortgage, you sell 100 shares of vodafone.

The idea of shares can go down is simplistic. Mortgages go to 0 over a 20 year period. Over the same period, a portfolio will tend to go up. That is, if you hold a portfolio of companies, every year you become less and less risky to the lender because the mortgage debt relative to the portfolio value will tend to decrease to 0.

Both meet the criteria, the lender will lend to both. Probably favouring the one with the additional capital.

BUT that wasn't your original point. You wanted a discounted interest rate, and as has been explained, that isn't likely to happen.

[UncleEbenezer]

For what it's worth, for many years I was interested in the possibility of something somewhat-similar. Have an offset mortgage, but with the offset account being an ISA. The purpose of that being to preserve ISA tax advantages while taking a net amount that would've been low LTV.

Never found a financial institution to take an interest. I suspect my mistake was to envisage something that would've benefited me but done nothing for their commissions.

[Gerry557]

For what it's worth, for many years I was interested in the possibility of something somewhat-similar. Have an offset mortgage, but with the offset account being an ISA. The purpose of that being to preserve ISA tax advantages while taking a net amount that would've been low LTV.

Never found a financial institution to take an interest. I suspect my mistake was to envisage something that would've benefited me but done nothing for their commissions.

The offset is tax efficient, you dont pay any tax on the savings just reduce your interest due. You can still put funds into an isa although that wouldn't reduce your interest. Although the income could be higher than the interest on the offset. Well in normal times, I think half the companies have stopped divis for a bit.

I did wonder about the safety net thing. If you had over £85k in the offset and the bank went bust. Would they give you back your £85k say sorry you have lost the other £100K you had but you still owe us the full amount?