Private banks seek to tie in loan clients

Private banks are tightening their lending criteria for large mortgages, insisting that clients invest cash with them in return for a loan, or to get the best rates.

Barclays Wealth on Friday introduced two tiers for lending, based on whether a client invests with them. A different rate will now apply for lending to bank clients, and lending to those with accounts plus £500,000 of other assets placed under management.

“Private banks have always given preferential rates to individuals who invest all their cash with them but now some banks are introducing stricter conditions for lending,” says Nigel Bedford at largemortgageloans.com.

“To access the lowest rates via a private bank, clients often have to invest other assets with the bank’s wealth management arm, but the amount of funds will depend on the bank.”

The Barclays Wealth announcement, follows a similar move by Barclays Wealth International (BWI), which last month introduced three lending tiers.

To get the best rate of 2.49 per cent on a 60 per cent loan-to-value tracker mortgage for five years with BWI, individuals will need to invest £100,000.

Clients who only want to borrow without investing will have to pay 0.2 to 0.3 per cent more interest on most fixed and tracker rate mortgages.

Experts say the shift in sentiment reflects the pressure on private banks to increase their capital reserves, in order to meet new regulations. The institutions became a dominant force in the prime residential mortgage market after high street lenders pulled out of the £1m-plus mortgage market following the credit crisis.

Simon Gammon at Knight Frank Private Finance says Coutts, the private banking arm of RBS, Barclays Wealth and HSBC Private Bank have been at the forefront of lending in this market but are focusing on retaining clients as long-term customers. In the current economic climate the banks can “cherry pick” the clients they want, according to Gammon.

Most stipulate the value of assets the client must have. For example, HSBC Private Bank will only deal with clients who have assets of £2m-plus, while Standard Chartered requires borrowers to have at least £1m in investable assets. Coutts asks for clients to have £1m of assets and RBS Private Bank wants borrowers to open a bank account with them.

“Some banks are lending for the business, whilst others are using the lending sprat to catch the funds mackerel,” says Simon Checkley, managing director at Private Finance. “This has been the way for some time.”

Others highlight how far private banks are willing to go to get the business. Charles Gothard, head of international tax and wealth structuring at Speechly Bircham, says that banks are using lending as “a hook to get new customers”.

“Sometimes banks will structure the loan in such a way to make sure that the client is tied into that product,” he says.

Naomi Heaton, chief executive at London Central Portfolio, agrees. “Things are really being turned on their head,” she says. “Some private banks are encouraging people to deposit their cash with them and then drawing down a loan, rather than using the cash for their property purchase.

“In this way, the client gets low borrowing rates, which, if all goes to plan, are more than covered by the returns on the cash that is being invested.

“This is a win-win situation for the bank. They not only get the cash to play with but they get a loan as well.”

There are clear benefits of being tied into a bank in the form of low interest rates.

“The wealthiest clients will always be able to obtain the lowest rates,” says Gammon. “While UK private banks tend to offer better rates than the high street – at around 2 per cent above base rate – new entrants into this market in the form of international private banks are offering even better rates at just 1 per cent above base.”

He names Royal Bank of Canada and Scandinavian bank SEB Private Bank as two such firms offering wealthy clients market-leading loans. But again, SEB requires clients to transfer over around 20 per cent of the value of the loan in investable assets.

Even with the tiered lending and stricter criteria, brokers believe private banks will continue to corner the large loan market.

“These banks are willing to be creative with funding structures than high street lenders, an important factor for wealthy clients who may have relatively modest basic salaries but large, regular bonuses as well as significant assets,” says Bedford.

“Many will lend in multiple currencies where appropriate and are comfortable with lending to trust structures and limited companies as well as individuals.”