Emily Bernstein is an experienced private banker at Investec who specialises in supporting legal leaders and senior lawyers. Here, she tackles the unique financial challenges facing senior legal professionals
I am a partner in a law firm and was considering purchasing a flat for my daughter using my profit distributions. Are lawyers still using a mortgage in a high-interest environment?
In practice it is not uncommon for the senior lawyers we work with to use a mortgage to purchase a property for themselves or their family, even if they have a significant personal income.
Firstly, the structure and frequency of profit distributions can vary wildly between law firms and it’s common for this form of compensation to be paid in irregular or deferred instalments. You may not receive one lump sum to fund your daughter’s new home outright.
Secondly, profit distributions often constitute a significant portion of annual income. If your monthly base draw is low, you may prefer to preserve capital for other outgoings by providing a smaller deposit for a property.
Thirdly, you may wish to diversify your portfolio by investing in other asset classes. In this case, it’s important to consider if the estimated return is likely to exceed interest costs incurred by taking out a loan.
Aside from the complexities of how you receive your profit distributions, a reluctance to use a mortgage can be rooted in a belief that in principle, mortgages are ‘the same’ and may leave you with a significant – and expensive – long-term commitment.
Tailored lending
While many mainstream lenders use a formulaic approach to calculating how much to lend you, and how you will repay the balance, there are alternatives. I have written before about the approach of private banks like Investec, which are relationship-driven and will look at mortgage structures on a case-by-case basis.
Investec has a team dedicated to working with legal professionals and many clients approach us for interest-only mortgages, to reduce their monthly repayments. Providing there is a credible final repayment strategy in place, this option suits clients who are willing to pay more in interest over the term. In addition, we can sometimes incorporate the ability to make capital reductions when they receive additional income, such as profit distributions, to reduce the debt more quickly.
High loan-to-value (LTV) mortgages
Also important here is the concept of leverage. If you choose a lender that can consider your wealth holistically, you may be able to borrow more, which may pave the way to a more desirable property for your daughter. You should flag all income, as well as any pensions, investments, and stock options, in affordability discussions.
You don’t mention if you work for a US law firm, but if so, your profit distributions may be received in dollars. With an Investec mortgage, we can also consider foreign currency income when determining an appropriate loan amount.
‘Also important here is the concept of leverage. If you choose a lender that can consider your wealth holistically, you may be able to borrow more, which may pave the way to a more desirable property for your daughter.’
Emily Bernstein, Investec
If you were to need foreign exchange support to buy the property, we have specialists on-hand who would not only manage the conversion to sterling, but could also secure the exchange rate in advance, so you know the level of proceeds you are working with.
We recently helped a partner at a US law firm to purchase a Grade II-listed property in South West London using a 95% LTV mortgage over a 15-year term, despite his income being received in US dollars.
Existing borrowing
It is worth stating that if you already have an existing mortgage on your own home or an investment property, the viability of a new mortgage for your daughter’s home must be considered. If it is financially sustainable to do so, it may be possible to secure one loan against both properties to achieve a lower loan-to-value and potentially lower repayments on aggregate. This would also equip you with one point of contact.
We assisted two lawyers who wanted to purchase a new family home in Essex for £2m, while retaining several existing properties in a portfolio, including buy-to-let properties and a home for a relative. In this instance, we offered the clients a high LTV loan with a 20-year term, predominantly structured on an interest-only basis.
‘If you need foreign exchange support to buy the property, we have specialists on-hand who would not only manage the conversion to sterling, but could also secure the exchange rate in advance.’
Emily Bernstein, Investec
With any mortgage, the debt is secured against the property so you must ensure that the financial commitment is affordable. In addition, there are often costs associated with taking out a mortgage and interest will be applied to the balance, so the overall cost of the property will be higher than if it was purchased in cash.
Emotional factors
Aside from the financial implications of applying for a mortgage, there will always be more emotional factors involved in this decision.
It may be your wish to empower your daughter to contribute to the cost of her new home. We recently provided a mortgage for a flat in London to a client whose son was named as a co-owner of the property and who shared joint responsibility for repayments.
Conversely, the stress of additional administration may be off-putting. As private bankers, it’s our job to mitigate this.
There’s undoubtedly a lot to consider beyond cost. You should not only decide whether a mortgage works for your family, but, if so, what the most appropriate mortgage might look like.
If you do choose to go down the mortgage route, this would not necessarily delay your daughter’s search. While cash buyers are certainly sought-after in the property market, it is possible for a loan to be drawn at speed.
Every financial decision is different, and I recommend you seek independent mortgage advice so that you and your daughter feel informed and comfortable.
Please do get in touch if you’d like to discuss your options further.
Important information: Your property may be repossessed if you do not keep up repayments on your mortgage. Investec residential mortgages are only available for residential properties in England or Wales and are primarily available to UK residents and subject to eligibility. Minimum eligibility criteria and terms and conditions apply.
You can only book an FX Forward which is for an underlying personal or commercial spending purpose. You cannot book an FX Forward for investment or speculative purposes, for example in order to achieve a gain based on movements in exchange rates. Also, you cannot book an FX Forward on behalf of any other person. Additional terms and eligibility criteria apply for FX Forwards.
Please contact Emily to discuss your needs.
E: emily.bernstein@investec.co.uk
