When it comes to mortgages, many people wonder if the size of their bank account or their income influences the terms of their home loan. Of course, in most cases, the more money you earn the larger mortgage loan you can often achieve. However, it’s a common belief that wealthier individuals will also automatically secure more favourable mortgage rates and pay less in the long run. But is this notion grounded in reality, or is it just a myth fuelled by misconceptions about the mortgage industry and wealthier people? In this blog, we’ll explore whether wealthier people truly pay less for their mortgages and unravel the factors that determine how home loans are priced and what gets you a more favourable deal.
Earn More, Borrow More, Pay Less?
As we have already mentioned, in most cases the more money you earn the more mortgage you can borrow. Lenders will determine how much they are willing to lend you based on income multiples and a debt-to-income ratio. What does this mean exactly? Well, in its simplest form, as long as your monthly debt (from loans, mortgages, finance agreements etc) does not go above a certain level compared to your monthly income then a bank or building society will be able to lend you more.
Likewise, if your required mortgage amount does not go above a certain multiple of your income (usually between 4.49X and 5.5X your annual income) then you shouldn’t have an issue with getting a mortgage. So, bearing that in mind, an individual who earns £200,000 a year could potentially borrow up to £1.1 Million (5.5X their annual income). And someone earning a more modest £50,000 a year could probably borrow around £225,000 (4.49X their annual income). In these circumstances wealthier individuals almost always have the upper hand.
But who ends up paying less in the grand scheme of things? People borrowing more substantial loans or with perceived stronger incomes can often get exclusive deals and products, and with the help of a mortgage advisor, can often structure their loan in a way that means they pay less than others. Here is a run through of some of the factors that can either make or break an application when securing a mortgage for high-net-worth borrowers.
Credit Scores
One of the primary factors that influence mortgage rates is the borrower’s credit score. Regardless of financial status, individuals with higher credit scores are generally offered lower interest rates. This means that a person with a stellar credit history, regardless of wealth, can enjoy the benefits of a more affordable mortgage. If you are a high-net-wroth borrower and you have been able to keep a pristine credit score, then this could really work in your favour to get a lower interest rate.
Income and Debt-to-Income Ratio
As we’ve already mentioned, generally the higher your income, the larger mortgage you can borrow. While a higher income may make it easier for individuals to qualify for larger loan amounts, lenders also consider the debt-to-income ratio. This ratio helps lenders assess an individual’s ability to manage their debt responsibly. Even if someone has a high income, if their debt obligations are significant, it may impact the mortgage rate they qualify for. If someone has a high income and their outgoings aren’t too large in comparison, then they may qualify for more competitive products offered by lenders. Your mortgage advisor will be able to go through all of this with you.
Loan-to-Value Ratio
The loan-to-value ratio (i.e. the amount of loan you are borrowing compared to the value of the property) is another critical factor in determining mortgage payments. Wealthier individuals may be able to make larger down payments, resulting in a lower LTV ratio. A lower LTV ratio often translates to lower mortgage rates, irrespective of overall wealth. So, for example, someone who can afford to put down a 50% deposit may be able to achieve an interest rate of 4.5%. But a less affluent borrower who can only put down a 10% deposit may only be able to get an interest rate of 5.80%.
Loan Type and Terms
The type of mortgage and its terms play a significant role in determining overall costs, and this is something that our advisors at Oportfolio help a lot of our more affluent clients to structure. Wealthier individuals may opt for different mortgage products, such as premiere loans or specific large loan products, which cater to higher loan amounts. While these loans may have different structures, they are not necessarily more affordable than conventional loans with favourable terms.
However, for larger some larger loans with lower LTVs, borrowers can potentially structure these loans to bring the costs down. One popular option is putting part of the loan on repayment and part on interest only. This means that on one part of the loan you would pay back the capital of the mortgage and the interest incurred, and on the other part you would only pay the interest.
For example, if someone was borrowing a loan of £800,000 they could potentially put £300,000 on repayment and £500,000 on interest only over 30 years. At an example rate of 5% this borrower would pay £1,600 per month on the first £300,000 and £2,684 on the remaining £500,000. Someone earning less and with a lower deposit would not normally have this option and would have to pay their loan back on a repayment basis only.
Do Wealthier People Pay Less On Their Mortgages In Comparison?
The idea that wealthier people inherently pay less for their mortgages is not entirely accurate. However, there are scenarios were earning more and putting larger amounts of money towards a purchase can be beneficial. While having more financial resources can provide certain advantages, mortgage rates are influenced by a combination of factors, many of which apply universally to borrowers. Credit scores, income, debt management, and market conditions are among the key elements that determine mortgage affordability.
Speak To a Specialist High-Net-Worth Mortgage Broker In London
If you are a higher earner and are potentially looking for a larger loan that isn’t going to cost you too much per month, then there are ways that a qualified professional mortgage broker can help you to structure your loan and achieve more preferential interest rates and products.
It’s essential for all prospective homebuyers and remortgagers, regardless of financial status, to understand these factors and work towards strengthening their financial profile. By doing so, people can increase their chances of securing a mortgage with favourable terms. If you or anyone you know is looking to get a new mortgage, we are here to help. Give our team a call today or send us a message, and we will guide you through the mortgage process.
