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Equity Partner Mortgages at Fitch & Fitch
Equity Partner Mortgages are designed for individuals who hold ownership stakes in their law or accountancy firms and benefit from a share of the profits.
The Challenges of Securing a Mortgage as a Newly Appointed Equity Partner
You’ve just made partner at your law or accountancy firm, and with a significant pay rise on the horizon, you’re poised to upgrade your home. However, securing a mortgage as a newly appointed equity partner can present unique challenges due to the way lenders perceive your income. Typically considered self-employed, you may find that lenders require a standard two years of income history to validate your earnings. Furthermore, the complication of your income being comprised predominantly of dividends and annual bonuses can delay the process.
Case Study 1: Securing a High LTV Mortgage for a New Equity Partner
A recent promotion to Equity Partner at an international law firm positioned a client to purchase a four-bedroom house in Chelsea valued at £3.9 million. The client, who earned his income in US dollars, faced challenges due to just starting to receive partner-level earnings and wanting to maintain ownership of an existing property, necessitating a high loan-to-value (LTV) mortgage.
The client’s newly adjusted net asset value (NAV) did not meet the typical lending criteria due to the recent change in his income status. This scenario required a tailored mortgage solution to accommodate his need for significant funding without selling his current home.
Our lending partner known for their flexible approach to high-net-worth clients understood the trajectory of the client's career and his income stability, they offered an interest-only mortgage with a 20-year term. This arrangement included mandatory capital reductions, aligning with the client’s financial plans and ensuring the mortgage would be comfortably managed with his projected income growth.
Case Study 2: PE Partner Seeking Flexibility
A private equity partner with a diverse income composition including salary, bonuses, and carried interest, all received in euros.
Having recently sold their home, the client was in the process of acquiring a new property. They were anticipating a significant receipt of carried interest in the near future, which they intended to reserve for potential tax liabilities and investment opportunities. The challenge was to secure a new home without overcommitting financially, maintaining flexibility for future financial obligations and opportunities.
Understanding the unique needs of private equity partners to maintain liquidity, our lending partner tailored a mortgage that minimized the client's cash tied up in real estate.
The solution comprised two key components:
15-Year Interest-Only Revolving Mortgage:
This part of the mortgage, secured against the client’s primary residence, offered unparalleled flexibility. It allows the client to access funds up to a pre-approved limit on an as-needed basis, much like a revolving credit line. This feature enabled the client to manage their cash flow efficiently, drawing funds for large expenses or repaying the balance as their financial situation allowed.
Five-Year Fixed-Rate Mortgage:
For the remainder of the property value, a conventional fixed-rate mortgage was arranged, providing stability and predictability for this portion of the property financing.
This innovative, dual-structured mortgage solution effectively addressed the client's needs for financial flexibility concerning their upcoming tax responsibilities and investment plans, all while accommodating the complex nature of their income, including carried interest. This approach ensured that the client could manage their new property investment without compromising their broader financial strategy.
How Can Fitch & Fitch Help Through Tailored Mortgage Advice?
At Fitch & Fitch, we understand the nuances of high-net-worth mortgage planning and the specific circumstances of equity partners. Our expert advisers have over two decades of experience in arranging bespoke mortgage solutions, and we have established connections with underwriters at leading banks and building societies, as well as private banking sectors that are well-versed in handling complex income structures of equity partners.
Immediate Use of Your New Income for Mortgage Applications
Unlike conventional requirements, we leverage our unique industry relationships to use your day-one income immediately for your mortgage application. With a signed letter from your partnership, we can potentially sidestep the conventional two-year tax return requirement, enabling you to use your new income level to secure a higher mortgage loan promptly.
Maximising You Borrowing Potential
Securing a loan that exceeds five times your salary is particularly relevant for professionals like yourself. While many lenders traditionally cap borrowing at 4 to 4.5 times an applicant’s income, your status as a high-earning professional opens the door to exceptions. At Fitch & Fitch Independent Mortgage Brokers, we advise equity partners on mortgage products tailored to their unique financial profiles. We can facilitate access to lenders willing to extend loans with higher annual income multiples, assuming underwriters are provided with compelling evidence of the low risk associated with each applicant.
The Popularity of Interest-Only Mortgages Among Equity Partners
Interest-only mortgages appeal to equity partners due to their flexible repayment structure. Under this arrangement, borrowers are only required to pay the interest on the loan each month, leaving the principal amount untouched until the mortgage term ends. This setup significantly lowers monthly payments during the interest-only phase, offering substantial cash flow benefits. However, it’s crucial to have a solid strategy for repaying the principal at the end of the term, whether through profit share distributions, refinancing, or other means. The flexibility and lower monthly outgoings make interest-only mortgages popular among equity partners, who may have variable income patterns.
Q&A: Understanding Mortgage Challenges and Solutions for New Equity Partners
A: Becoming a partner at a leading law firm is often seen as a lucrative step up from being a salaried employee. As a partner, you transition to having a stake in the firm's success, which may involve moving to a salaried partner or self-employed equity partner role. Financial structures can vary: some firms use a 'lockstep' model where partners are paid equally based on their year of partnership, while others may use a 'merit-based' system that ties pay to performance metrics like hours billed or new business secured.
A: New partners often face challenges when securing a mortgage due to the unique nature of their compensation. Equity partners might have a lower fixed monthly income complemented by variable, sometimes sporadic, profit distributions. For salaried partners, their income typically includes performance-related bonuses, which can complicate standard mortgage assessments by high street lenders, who usually require two to three years of detailed accounts to average out earnings.
A: The primary challenge is that many traditional lenders are cautious about lending to clients who are considered self-employed, like equity partners. These lenders typically want to see a longer financial track record, which is not possible for lawyers who have only recently become partners. Additionally, becoming a partner often requires a significant capital commitment, stretching the individual's liquid assets and potentially necessitating a high loan-to-value (LTV) mortgage, which not all lenders offer to those with a short self-employed history.
A: Yes, partners in global law firms often face further hurdles, such as receiving part or all of their income in foreign currencies. This situation became more complex following the introduction of the Mortgage Credit Directive (MCD), which led many lenders to withdraw from offering mortgages in foreign currencies due to stricter regulations.
A: For partners with complex, high-net-worth financial profiles, private banks are often the most suitable avenues. These banks have the expertise and flexibility to accommodate high-value loans, understand varied income streams, and manage foreign currency issues effectively. They are well-equipped to handle the sophisticated financial profiles typical of new equity partners at major law firms.
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Looking for an Equity Partner Mortgage?
If you require further information or wish to discuss your unique mortgage needs, please don’t hesitate to contact us at Fitch & Fitch. With offices in Canary Wharf, Cambridge, and Colchester, our experienced Private Office team is ready to provide you with expert advice and bespoke mortgage solutions tailored specifically for equity partners. Reach out today via email at info@fitchandfitch.co.uk or call 020 7859 4339. Let us help you navigate your mortgage journey with ease.
