On the case: Mortgages for law firm partners
Peter Izard is business development manager at Investec Private Bank
Becoming a partner in a leading law firm is an aspiration for many lawyers and the move from being a salaried employee to being a salaried partner, or self-employed equity partner and having a stake in the success of the business is usually a lucrative and enticing one.
But conversely, it can also make life harder for newly qualified partners to secure a mortgage.
Each partnership is different; many firms, for example, will follow a ‘lockstep’ model, with all lawyers who become partners in the same year typically earning equal compensation.
But others may offer a ‘merit-based’ pay system that links remuneration to performance metrics, such as the number of hours billed or the amount of new business brought in.
However the partnership is structured, it usually results in equity partners drawing a relatively low monthly income in comparison to their often lumpy profit distributions.
In the case of salaried partners, typically their guaranteed annual income is subsidised by performance0related bonuses, which again can be complex for the high street to accommodate.
This presents the first stumbling block for many lenders. With a client who is self-employed, many high street lenders will want to see two- to three-years of accounts and will generally take an average of these figures.
An increasing number of specialist lenders are able to consider a shorter track record, but if your client is a lawyer who has recently become a partner, their mortgage options already become more limited.
The next potential issue is that becoming a partner usually entails a significant capital commitment, so recent partners can frequently find that their cash resources are stretched.
This means that clients in this position will often want a high loan to value (LTV) mortgage, which may not be on offer from many of the lenders that can underwrite self-employed mortgages based on just one or two years’ accounts.
Foreign currency is commonly a further barrier to getting a mortgage for new partners who work in global law firms.
It’s not uncommon for equity partners at these firms to take some – or all – of their income in foreign currency, as this can be more appealing dependent on the markets.
This would again exclude a number of lenders as many lenders withdrew from foreign currency mortgages following the introduction of MCD, which imposed more stringent controls and processes.
So, if you have a client who has just made partner at a law firm, where can you turn? The good news is that private banks have the expertise to assist this type of client who has high net worth and positive prospects, but complex circumstances.
Private banks deal in bespoke mortgages, so factors such as recent self-employment, high LTV or even foreign currency needn’t be a problem as they are experienced in structuring solutions to meet the needs of the individual.
This could, for example, include securing multiple properties to enable high LTV lending, or taking a more pragmatic view in assessing income.
Here’s an example of how Investec Private Bank dealt with a client who was a partner at a Magic Circle law firm and wanted to sell existing property in order to buy a family home outside London.
The client’s existing property was on the market but had not sold by the time they wanted to purchase their new home.
This sale of the existing home would be partially used to pay down the mortgage, but the client was still looking at an initial 90% LTV.
In addition, while the client was progressing along the partnership path, it was still early days and so their previous and current earnings certainly didn’t reflect their future potential.
We were able to examine the client’s earnings over the last three years and take the average of the three.
We were also able to compare the client’s income against equivalent partners at the firm to build a picture of earnings for the financial year.
This holistic and bespoke approach gave us a much stronger picture of this client’s earnings and ability to service the mortgage.
Furthermore, we structured the mortgage in two parts to better fit the particular needs of the client.
The majority of the loan facility was confirmed at a fixed rate, while the second portion was placed on a variable rate, which was to be repaid within two years – once the client’s existing property had sold.
The first part of the mortgage was also set as interest-only for the first two years to reduce the client’s outgoings while they sold their current home.
Structuring this type of solution is a typical requirement when working with partners at law firms, something Investec Private Bank has experience in doing.
We have a team who specifically looks after partners at law firms and are accustomed to the nuances of each firm and can therefore work with them to provide a positive outcome in the face of significant complexity