Ultra-High Net Worth Mortgages are a special kind of debt. They are both a method for avoiding taxes and a way to effectively leverage a balance sheet. They are also often the second most cost effective source of debt for wealthy families. While mortgages are heavily regulated there are several ways in which a wealthy family can better position themselves when entering the mortgage market. By mastering these five areas your family office can better position you to effectively negotiate the terms of your mortgage.
Step one: Increase your Liquidity Coverage Ratio
The first risk rating answers the question, "If something were to go wrong for this borrower, how long does the borrower have to put in place a solution before the bank shares in the borrower's distress?" They address this by calculating your "liquidity coverage ratio" by dividing your unencumbered cash and liquid investments by your total monthly debt service. This gives them a number of months that you could continue to pay your obligations if your cash flow were to stop altogether. Banks prefer more than 6 months of liquidity. To best position yourself, try to have more than a year's worth of liquidity reflected in the last three months of financials.
Step Two: Lower your Debt-Service-Coverage Ratio
The second most important risk rating answers the question, "How much of their monthly cash flow is going to cover debt payments?" They want to see less than 36%. The intuition behind this question is that, on average, consumers with less than 36% debt service default less often. If you have 36% or less of your income going to debt service then you are likely not an over-levered and risky borrower in the event of a recession. It's easier to stop going out to steak dinners with nice wine than it is to no longer have a mortgage. For this rating, under 36% is good, under 30% is very good, and under 25% is strong. you should be at least under 30%. This is calculated as if you already have this new loan.
Step Three: Lower your Balance Sheet Leverage
Thirdly, by taking your total liabilities and dividing them by your total assets one can arrive at total leverage. Banks typically prefer the borrower to have less than 40% balance sheet leverage. Again, this is calculated on a post purchase basis. So if you had $10million of assets before the home purchase and bought a $5million dollar home with 60% debt, then this ration would be calculated as $3 million of debt divided by $15 million of assets which equals 20% balance sheet leverage. This would be very strong but if you already had $3 million of debt on the balance sheet, you would be about breakeven. More than that and you'd need to use your golden ticket.
Step Four: research Loan-to-Value Ratios for your purchase price
The debt on the property also matters. This gives the bank a final recourse if they have to repossess the property and try to sell it. The larger the property the more equity they want to see. While mass affluent families might be able to find debt ratios at 80% loan to value, it is not uncommon to see 40% down payments on homes above the $6 million value range.
Step Five: Review your Credit History
While this metric is vital to mass affluent families, ultra-high net worth families often do not have much credit history because they may not have used much debt. That said, a history of late payments is much worse than no history at all. Payment history matters much more than credit score. That said, this is yet another area the borrower can shine and if they do, they are in a better position to negotiate on the terms that matter most to them.
Some thoughts on Negotiating the right deal
Remember that not all banks are the same. One bank might be thrilled to do your home mortgage in Seattle and another bank might have too much exposure to the Seattle market in their loan portfolio. For this reason and many others, it is good to either hire a mortgage broker (who can look across multiple lenders) or to self-source multiple lenders (which takes a lot of your time). Ask yourself what matters most to you in the mortgage deal. Is it the rate, the loan size, speed to closing, or is it something else? Then optimize your application to accomplish that objective. You are busy and value your time. Put together a "lender package" for your broker and have them "go to market" with your loan. They will come back with a recommendation and that will include both the rate and the lenders ability to execute your loan on time. Your family office can put this package together for you and then review the mortgage proposals and provide the broker with important feedback to ensure the solution they develop is optimized for your needs. Once you come back into the picture to make a decision you will be in the best position to get the best deal for your family before you ink the deal.
In summary, make sure you take the time several months in advance to get your finances in line for the lender. Make sure you have strong unencumbered liquidity, low debt service, low balance sheet leverage, and plan to make a strong down payment with a long history of paying on time. This will put you in the best position to negotiate on your mortgage rate. Last but not least, don't forget that you can renegotiate your rate again and again. Lenders change, the rate environment changes, and your home value changes. A strong family office will keep tabs on all of this for you and encourage you revisit your rate decision when rates fall. A bank will hope you forget and just keep paying that high rate.