UAE expats: How easy is it for a non-UK national to buy property in Britain?
A detailed look at top mortgage options for non-UK nationals buying real estate in the UK
If you are not British and you are wondering whether you can own property in the UK, the answer is yes, you can buy property in the UK – even if you do not live in the country.
Many expatriates have aspired to own property in the UK. While they may currently be living abroad, there are many reasons why expats are buying property in the UK and why the country’s real estate is desirable; as an investment, as somewhere to stay occasionally or as a way to provide for future needs.
As an expatriate, if you have aspired to own property in the UK, you might as well go ahead! You could buy it as an investment or simply as somewhere to stay occasionally!
That said, buying property in the UK as a foreigner is easier if you are a cash buyer – i.e. do not need to apply for a mortgage or additional borrowing as it may be difficult to apply for such a mortgage.
So if you are looking to buy a property and have access to funds, you can own property really quick. But what about if you need to buy property on a loan? Does it complicate things? Let’s find out.
Overcoming loan hurdles
While purchasing UK property is fairly straightforward, for those who live overseas, things haven’t been that simple.
Non-UK citizens often have had difficulty accessing loans to buy property (mortgages) in the UK since they receive their salaries in a foreign currency, lack a UK credit history (a creditworthiness check), or simply because of strict and inflexible lending criteria from many high street lenders.
There’s also the paperwork needed to get the mortgage, three months of bank statements, pay slips, ID and proofs showing where you live.
All this added to the fact you are a non-UK resident expat living in a country thousands of miles away with no real way of meeting with a local mortgage broker did make things harder.
Some still reluctant
There have been times when mortgage lenders were reluctant to lend to overseas borrowers because they’re often not set up to handle the extra work this entails.
When a customer lives in the UK, it’s not too hard for the banks to get hold of them (or their property, should it be necessary); if they’re abroad, though, the bank must deal with another country’s legal system, which can make it much more difficult to resolve lending issues.
For many banks this is reason enough not to offer mortgages for expats at all - it simply isn’t worth the hassle, when the vast majority of their customer base resides in the UK.
Not the case anymore
But that isn’t the case anymore.
There have been a growing number of UK lenders in the last decade specialising themselves in offering mortgages and short term finance designed specifically for non-UK citizens buying or refinancing UK property.
These lenders have looked to address some of the biggest challenges expats face like the inability to meet with the banks or a broker in person, getting documentation back to the UK, receiving regular updates, having all parties to the transaction on the same page and for the same result and knowing that you are getting the best terms for your situation and not being ripped off by the bank or the broker.
There here have been a growing number of UK lenders in the last decade specializing themselves in offering mortgages and short term finance designed specifically for non-UK citizens buying or refinancing UK property.
To ensure the mortgage lender you are doing business with is accredited and licensed, you can check the following regulatory UK FCA registry (https://register.fca.org.uk/).
No need to be in the UK
Most lenders now negate the need for its clients to be in the UK, with all communication done via email, by phone, by video call.
They also work with lenders that will accept online pay slips, online bank statements and ID certified by someone in your country and the couriered to the UK. They assign clients to individuals that specialize in mortgages and updates clients on a regular basis.
The lenders also offer clients contacts to solicitors and surveyors and property professionals such as property finders to ensure completion of the loan as quickly as possible.
These UK-based financiers provide mortgage and short term finance from £250,000 ($305,665 or Dh1.1 million) to £100 million ($122 million or Dh449 million) with terms ranging from 3 months to 30 years.
Loan options
These loans are of various types, but essentially the ones that are popular among expats are of two types - residential and buy-to-let mortgages.
If you (or a family member) is planning to live in the property for any time at all, then you will need a residential mortgage. If not, and the property will be rented out to private tenants, then you will need a Buy-to-Let loan.
So what’s the difference, and what does this mean for expats? Let’s take each mortgage type on its own, and examine what sets them apart from one another.
• Residential mortgages
Residential mortgages are the largest, and one of the most common, forms of credit in the UK, and make it possible for millions to buy homes in the UK.
The average home in the UK currently costs around £234,000 (Dh1 million), but there are big regional variations – in London the average is over £400,000 (Dh1.8 million).
The average home in the UK currently costs around £234,000 (Dh1 million), but there are big regional variations.
Blackpool, one of the most famous seaside towns in the UK, offers a one-bed flat selling for an average of £63,012 (Dh269,630), while Shildon in County Durham offers a two-bedroom mid-terraced house for about £59,000 (Dh252,463), as of January 2020.
Wherever you are buying, unless you’re lucky enough to have hundreds of thousands of pounds in savings, you will need to borrow a great deal of money. This is where a residential mortgage comes in.
Residential mortgages are regulated by the Financial Conduct Authority (FCA), the UK oversight body which guarantees consumer rights across the country. This regulatory body safeguards homeowners who have a mortgage, and establishes several key ground rules that define the terms of a mortgage loan.
However, because residential mortgage providers must receive FCA accreditation (which isn’t that easy to do), not every lender offers it. But there are a few mainstream mortgage providers that are keen to offer mortgage products to overseas customers. The options for a customer are limited because of the FCA requirement.
Expats in need of a residential mortgage still have options though, and it’s by no means impossible to find a reliable, competitive lender in the mortgage market.
There are quite a lot of specialist mortgage brokers that source the best-suited mortgage products for British and non-British expatriates as well, and help them to find the funding they need to buy a property in the UK.
Expats in need of a residential mortgage still have options though, and it’s by no means impossible to find a reliable, competitive lender in the mortgage market.
• Buy-to-Let mortgages, an expat favorite
A buy-to-let mortgage is a secured loan for people who want to buy a property, whether a house or a flat, then rent the property out to tenants.
These mortgages differ from standard residential mortgage in many key aspects. If you already own a home and wish to let it out, you’ll need to tell your mortgage provider - they will then switch you onto a Buy-to-Let mortgage instead.
Because Buy-to-let (BTL) mortgages are essentially a form of commercial finance (a privately rented property is a business), they are not subject to the same regulation as a residential mortgage.
This means that lenders without FCA certificates can provide BTL mortgages to expats, and the range of lenders available to expats is consequently much broader.
This means that expats generally have more options to choose from when seeking a buy-to-let mortgage, and the lenders operating in this sector are also better able to handle applications from expat borrowers.
Residential versus Buy-to-Let (BTL) mortgages
Now let’s weigh the two types of expat mortgages, highlighting its perks and risks.
• Buy-to-let expat mortgages are significantly more expensive than residential expat mortgages, even for UK customers.
Usually, a Buy-to-let mortgage requires a larger deposit and will incur a higher rate of interest.
This is because lenders often seek extra security, considering that there could be periods with no tenant while renting out a property, or the tenant may fail to keep up with their payments. This can then lead to the landlord deferring on their mortgage payments.
• There are certain types of BTL mortgages that are complex, and expats will need to fully understand what they need to in order to get the best deal.
It gets complex when you have mortgages that are coming to the end of their fixed rate term and you want to remortgage to get a better deal with better rates.
Beware of taxes you pay
If you've never owned a house before and are purchasing a buy-to-let property for the first time, you won't have to pay the buy-to-let stamp duty rates. But this only applies to those who intend to live in the property, and not overseas buyers only looking to invest and rent out.
Also, according to the latest budget, there has been increase in stamp duty for overseas buyers. Non-resident buyers will now pay an additional 2 per cent stamp duty.
Until now, overseas buyers were subject to the same stamp duty as UK residents, going from 0 per cent for properties under £125,000 (Dh551,815) up to 12 per cent for those worth more than £1.5 million (Dh6.62 million).
So anyone buying a property that costs more that £125,000 and who isn't a first-time buyer has to pay stamp duty. The stamp duty bill for a £500,000 (Dh2.2 million) home is £15,000 (Dh66,217), rising to £43,750 (Dh193,135) for a £1 million (Dh4.41 million) home and £93,750 (Dh413,861) for a £1.5 million property.
High tax rates are also seen hampering home sales in expensive areas, such as London and the South East.
According to the Budget document, property transaction taxes - including Stamp Duty - will bring in £12.8 billion (Dh56.51 billion) in the 2019/20 tax year. This will rise to £18.7 billion (Dh82.55 billion) by 2024/25.
So with more taxes around the corner, it would seem like an ideal time to jump on the bandwagon now.
Unfamiliar terms?
Now let’s go through a glossary of some of the terms you will come across when exploring your loan options:
Let’s first go through what type of interest rates are offered:
• Interest-only
An interest-only mortgage is one where you solely make interest payments for the first several years of the loan, as opposed to your payments which generally include both principal and interest.
The principal (the borrowed amount) is repaid either in a lump sum at a specified date, or in subsequent payments, or at the end of the loan term. Usually, interest-only loans are structured as a particular type of variable-rate mortgage (interest rate that varies and set by the lender).
An interest-only mortgage is one where you solely make interest payments for the first several years of the loan, as opposed to your payments which generally include both principal and interest.
But remember that while interest-only mortgages mean lower payments for a while, they also mean a big jump in payments when the interest-only period ends.
• Rolled-up or compound interest
Compound interest (or referred to as ‘rolled up’ interest) is by far the most common form of interest on UK loans and mortgages. It is a fair system of interest calculation though a bit more complicated mathematically.
Compound interest or rolled-up interest is a fair system of interest calculation though a bit more complicated mathematically.
Loans with rolled up interest are a popular choice among borrowers who do not have regular cash flow, and therefore cannot cover regular interest costs, however they have a clear exit strategy which will allow loan repayment and interest cover i.e. the sale of a property.
• Fixed interest rate
A fixed-rate mortgage is a mortgage loan that has a fixed interest rate for the entire term of the loan. This gives you set monthly repayments for a number of years, typically between 2 to 5 years, but sometimes as long as 10 years.
They can be very beneficial if interest rates rise significantly as your repayments will not become more expensive, however you will not benefit from falling interest rates.
A fixed-rate mortgage is a mortgage loan that has a fixed interest rate for the entire term of the loan.
• Tracker interest
This will be pegged to the Bank of England’s base rate, plus a charge to you on top that will be pre-agreed for set amount of time.
For example, if your tracker mortgage is the Base Rate + 2 per cent, and the Base Rate rate is 1 per cent, you will pay 3 per cent. If the Base Rate rises to 2 per cent, you will pay 4 per cent.
• Variable interest rate
Your interest rates will vary at the discretion of the lender. This means that the cost of your mortgage could (and likely will) be increased from the initial rate.
However, this is unlikely to be a severe or sudden increase as a mixture of competition and fear of bad publicity tends to stop variable mortgages hiking up to high rates.
Your interest rates will vary at the discretion of the lender. This means that the cost of your mortgage could (and likely will) be increased from the initial rate.
Other summarized concepts that would help familiarizing with:
• Leverage
This is an investment strategy using money that is borrowed in order to generate additional investment returns.
With a 10 per cent return on investment (Dh1,000 from Dh10,000) will equal a 20 per cent return to the investor investing just Dh5,000 of his/her own money.
But borrowing/interest costs will take a cut out of this investment return. It is obvious that as long as the return from investment is above the borrowing costs, the investor will benefit.
In real estate, the most common way to leverage your investment is with your own money or through a mortgage. Leverage works to your advantage when real estate values rise, but it can also lead to losses if values decline.
• Loan to value ratio (LTV)
Your loan to value is the amount borrowed set against the value of the property.
If you have a deposit of £40,000 (Dh177,163), you will need £160,000 (Dh708,654) to be able to afford a £200,000 (Dh885,817) property.
Your loan to value is the amount borrowed set against the value of the property.
Borrowing £160,000 for a £200,000 home gives you an 80 per cent loan to value ratio, with your £40,000 deposit accounting for the remaining 20 per cent.
UAE expats typically need a minimum 25 per cent deposit to secure a mortgage, making it essentially a 75 per cent loan to value ratios.
The lower the ratio, the smaller the risk for the lender and the better the interest rates offered to the borrower. The best rates come with 60 per cent LTV mortgages, which are the lowest available LTV mortgages.
In the middle there are 80 per cent, 75 per cent and 70 per cent LTV mortgages and offer very competitive rates with manageable monthly repayments. 95 per cent LTV mortgages, 90 per cent LTV mortgages and 85 per cent LTV mortgages are all at the high end of available LTVs. These may have more expensive rates, but offer a way for first time buyers to buy a home.
The highest LTV you can is with a 100 per cent LTV mortgage but these are rare. They require no deposit but often charge very high rates of interest and require guarantors. So, it is best to make as much of a deposit as possible, to lower your LTV.