For expats considering mortgaging to fund the purchase of a UK property, the Brexit vote calls for a fresh perspective on the state of the market.
For one thing, the exchange rate ‘bonus’ is difficult to ignore; your euro, dollar or UAE dirham will, at present, buy you markedly more in British bricks and mortar compared to the situation pre-23 June. But the opportunities currently presented by taking out a mortgage on a UK property extend further than simply taking advantage of forex and picking up a bargain.
Right now, expats especially are encountering a unique investment environment; yet it remains as important as ever to consider the fundamentals. With this in mind, here are the points for expats to focus on when deciding if now’s the time to commit.
1. Cheap borrowing looks set to continue
Just a year ago, Bank of England governor Mark Carney was suggesting borrowers should brace themselves for slow-but-steady rate increases. This has all changed. Even before Brexit, global uncertainties had caused the BoE to change its tune. Now, as one analyst put it after the July Bank of England meeting: “Rates could conceivably remain at rock bottom for the next five to ten years”
In 2007 when base rates were at around 5 per cent, borrowing charges on buy-to-let mortgages were around 7 per cent. Now they are at 3-5 per cent in many situations, with the potential for further reductions if and when the base rate is cut. Borrowing could be set to become even cheaper.
2. A stress-tested mortgage market
We learned our lessons after the 2008 downturn; the days when mortgage applications were approved without proper scrutiny are long gone.
There is now a requirement for thorough stress-testing: asking not just whether an applicant can afford to borrow at present, but also considering in detail what the individual’s chances of meeting their obligations are if things change - i.e. if rates go up. Interest only loans are now a rarity, while maximum loan amounts on buy-to-lets are capped based on realistic market rents.
These and other changes mean that the UK mortgage market is probably the most sophisticated, the most mature and well-developed mortgage market in the world. Sensible lending criteria benefits all borrowers; not just those who might be at risk of defaulting on their repayments. The aim is to keep unsustainable growth in check, helping to ensure that market prices reflect true market value.
3. Increased affordability
Lenders are responding to changing demographics by increasing their age limits for mortgages; this year, for instance, two major institutions have announced that customers with retirement income can borrow up to the age of 80.
When you ask yourself “How much can I borrow?”, if your deposit and income is in a currency other than sterling, then already, you answer is likely to be markedly higher than it was pre-Brexit.
Potentially it gets even better: when a lender asks “How much can we offer this applicant?”, a combination of low expat mortgage rates already, plus the prospect of an imminent base rate cut in the near future, the exchange rate bonus and (depending on your age), more favourable lending criteria, could open the door to the difference between a property of, say, £250k a year ago compared to one of £300k or more today.
4. This is not a rerun of 2008
Markets dislike uncertainty, as do businesses. This has led to volatility on the markets and a leaking of support for sterling and for the shares of UK companies. However, it would be inaccurate to say that this is a rerun of the 2008 downturn. In that instance, irresponsible lending practices and a failure on the part of banks to ensure that they were bolstered by adequate capital reserves - combined with a lack of oversight, came together to trigger a global crash.
Those issues were addressed by governments and regulators in the aftermath of 2008. Fundamentally, banks - and the UK economy as a whole is in a much stronger position to withstand any post-Brexit jitters.
5. Lenders are being encouraged to keep on lending
The Bank of England is seeking to encourage ‘business as usual’ - and that includes doing what it can to ensure that banks continue to lend to businesses and individuals. The 2008 crash led to stricter rules on bank capitalisation; all banks are required to hold a certain level of capital to ensure they stay solvent should the unexpected hit. Part of these reserves are, in effect, ‘rainy day funds’ (counter-cyclical capital buffers).
Recently, the BoE lowered the capital requirement for banks. The ‘funding for lending’ scheme, in which banks are provided with cheap loans in return for lending, may also be extended. The BoE is committed to ensuring a flow of funds to responsible borrowers. Compared to pre-2008, it is in a much stronger position to enable this.
6. A wider choice for borrowers
Brexit also gives lawmakers the ability to revise or overturn the European Mortgage Credit Directive, which came into force earlier this year. Critics say this directive offers little or no benefit to consumers and actually makes it more difficult for banks to offer loans to expats. Overturning it will be good news for the market.
In terms of borrower profiles, the expat market has a lot to recommend it. Expat borrowers tend to be a “safe bet”: they are solvent, astute and generally able to service their debts. Just like investors, banks will also be looking to extend their horizons and focus on reliable profitable markets. To avoid over-reliance on lending to UK residents in an era of super-low borrowing rates, they could focus on buy-to-let borrowers from abroad with renewed vigour.
All of this could lead to greater choice and better deals for expat investors.
- The writer is the Managing Director of UK-based overseas property loan specialist Liquid Expat