High Loan to Value Interest Only via a Trust Structure

THE SCENARIO

The most interesting high loan to value interest only case I have most recently been working on is for a UK national, domiciled in Luxembourg but living and working in Hong Kong for the next few years. He works for an international investment bank.

The client wanted to buy a £3.5 million country house in Surrey so that he and his family had a home to return to in a few years when his contract in Hong Kong runs out. He wanted to borrow 75% LTV on the property.

However, the situation was not quite as straightforward as this because my client had a strong preference for a high loan to value interest only solution and he also wanted to purchase the property using a trust. He mainly wanted to do this for inheritance tax reasons and was able to consider this because of his domicile location.

Due to the fact that the clients are not planning on returning for a few years they have decided the vendor could remain in the property and rent it out. This effectively would make the property a buy to let in the short-term before the family return to make it a main residence. In summary, this meant that in the short term we were setting up a high loan to value interest only, ex-pat, buy-to-let mortgage via a trust, which will later become the main residential residence… (a bit of a mouthful, I know!). This is important as the two ‘phases’ of this mortgage are legally very different.

The first hurdle to overcome was that private banks typically only like to lend up to 60 – 65% when they are considering high loan to value interest only solutions. The fact that the house was in Surrey also did not work to our advantage as lenders are always at their most comfortable lending in Central London. We also did not have the bolster of AUM to negotiate the position as my client was not keen to move these assets.

Bearing the above circumstances in mind I decided that the best approach for this case would be to meet with the bank face-to-face, with all the client’s information. I wanted them to fully understand the entirety of my client’s position and asset profile.

This was successful as I got a pre-agreement from the committee to accept 75% via the trust structure. Once I had fully explained the way in which the trust was structured the bank were happy to proceed with this high loan to value interest only proposal.

The final terms on the property were initially set as a buy to let at 3.5% over LIBOR. When the property becomes a residence the terms would move to 3% above LIBOR. I further included pricing reductions should the debt reduce below 70% LTV. The client expected to pay off the high loan to value interest only mortgage within 5 years so this circumstance suited him perfectly.

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