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When investing in UK residential property, pay close attention to the tax liabilities Image Credit: Shutterstock

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!

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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.

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Property sale boards sit on display outside residential properties in Camden, London, U.K. Photographer: Jason Alden/Bloomberg Image Credit: Bloomberg

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.

Why banks are concerned?
Banks are concerned with the risk each individual borrower poses, and the likelihood of them losing their money if they approve a loan to them.

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.

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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.

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A London street. The victory of the Conservatives at the polls has put an end to sentiments that foreign buyers of UK property would have to cough up more in taxes. Even the Labour Party has decided to do away with the divisive Mansion Tax. Image Credit: Pankaj Sharma/Gulf News Archives

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.

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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.

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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.

How residential mortgages work in the UK?
A residential mortgage is a large long term loan taken out by one or more individuals to buy a home to live in. With a residential mortgage the home must be used as a residence by the borrowers, not rented out to tenants or used for commercial purposes. So, as mentioned earlier, this applies only if you (or a family member) is planning to live in the property for any time at all, now or in the future.

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.

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• 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.

Buy-to-let mortgage is increasingly popular among expats!
Buy-to-let mortgage is increasingly popular among expats. It allows expats to retain a potentially valuable slice of UK real estate which they can either move into or sell in the future, and the rental income it provides is often enough to cover the costs of the mortgage. In many ways buy-to-let investments are ideal for expats who want to keep their options open, which explains their continuing popularity.

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.

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A buy-to-let strategy offers regular rental income, long-term capital growth and security, even for those with a mortgage to pay Image Credit: Shutterstock

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.

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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.

Recent changes in government rules!
The UK government has recently changed the rules for buy-to-let buyers, tacking on an increased Stamp Duty fee of 3 per cent and reducing the amount of tax relief available for landlords.

• 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.

Keep in mind!
Banks need to have Financial Conduct Authority (FCA) certification in order to provide a residential mortgage loan, but most banks large enough to be FCA-accredited are chiefly concerned with their UK customers, not overseas ones. And because residential mortgage providers must receive FCA accreditation (which isn’t that easy to do), not every lender offers it.

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.

Tax
Tax graphic Image Credit: Pixabay

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.

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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.

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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.

Example of interest-only mortgage
With a 25-year mortgage of Dh100,000 with an annual interest rate of 5 per cent, for example, the monthly payment would be Dh417 each month with an interest-only mortgage. At the end of the mortgage term you would still owe your lender Dh100,000.

• 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.

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Example of rolled-up interest mortgage
Take Dh1,000 loaned over five years, with 10 per cent interest and Dh260 in payments being made each year. The interest is essentially calculated on your entire new balance of Dh840 at each term’s end rather than the starting principal amount.
Compound interest table
Compound interest table Image Credit: Self

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.

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• 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.

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FILE: The Bank of England (BOE) stands illuminated at dawn in the City of London, U.K., on Monday, July 3, 2017. Andrew Bailey will be the next head of the Bank of England after the government chose to replace Mark Carney with the U.K.’s top financial regulator, just as Britain faces the next phase of its departure from the European Union. Photographer: Jason Alden/Bloomberg Image Credit: Bloomberg

• 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.

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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.

Example of leveraged investments
For example, by borrowing Dh5,000 to buy Dh10,000 worth of shares/property/pensions, an investor will be providing Dh5,000 up front and the lender the rest.

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.

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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.

Understanding LTV ratios in the real world
Loan to value ratios of 80 per cent and lower are typically seen as low LTV ratios, whereas LTVs over 90 per cent are considered higher.

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.