Expat Mortgages in the UK
There are many mortgage options available in the UK and it can become a little overwhelming at times, for long-time locals and newbie expats alike. To help, we’ve collated all the information out there to create this comprehensive expat’s guide to everything you need to know about getting a mortgage in the UK.
Depending on where you’re looking to buy, UK’s housing market can get very competitive, especially in London. It’s best to secure a mortgage with a lender before you even start looking for a property to buy.
This will allow you to know your budget, be in a much stronger negotiating position when you do find the right property and avoid being beaten by another buyer.
Before you think about applying for a mortgage, you need to make sure that all your financial affairs are in order and have all paperwork ready to show details of your earnings and regular spending.
New rules were brought in on 26 April 26, 2014 to ensure mortgage lenders carry more responsibility for their actions. This means that borrowers now must pass stricter credit checks and all incomes must be verified. Due to these stricter rules, it’s a good idea to first carry out a credit search on yourself before applying for a mortgage.
Your mortgage lender will weigh up your essential spending against your income to find any gaps and decide on a mortgage offer from there.
Be ready to answer questions and provide documentary evidence on things like feeding the family, child care, car loans, personal loans and credit cards, energy bills, and any other regular outgoings such as gym memberships and mobile phone contracts.
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Where to get a mortgage
You can apply for a mortgage directly from a bank or building society, choosing from their product range. You can also use a mortgage broker or independent financial adviser (IFA) who can compare different mortgages on the market, as well as mortgages which are not offered directly to customers.
There are hundreds, possibly thousands of mortgage deal options in the UK, so it’s important to do your own research to work out which deals are best for you. The best starting point is to both check with your bank to see what they have on offer to existing members, and to speak to a mortgage broker.
The best place to start is to talk to a mortgage broker and get their thoughts and recommendations on what works best for you. There is no obligation to go through with their recommendations, however if you find a good one, they’ll be very helpful with explaining all your options, offer you advice on the whole market, and find you the best deal.
Benefits of mortgage brokers
The benefits of using a mortgage broker include getting help to look at the overall costs of a mortgage to find the best deals, getting access to exclusive deals which can be cheaper than going directly to the lenders, saving time on the application process through their help and guidance, and having more rights if the mortgage turns out to be unsuitable for you.
Mortgage brokers are also especially helpful if your situation is a little different, difficult, or you need some specialist advice. For example, if you have an irregular or freelance income, a poor credit rating, or have just moved to the UK and haven’t ‘officially’ (i.e. on paper records) settled in yet, a mortgage broker would be beneficial.
Source: Flickr | Anna Stroumpou
Avoid any brokers who only offer restricted products from a limited number of lenders and always ask with your broker whether you’re being offered information only or advice, because if they’re providing you advice, they have a responsibility to find you the best deal.
Be sure to check your broker’s credentials by ensuring they’re on the FCA register and always ask them to explain how they get paid and whether they can tell you about all the mortgages on offer, not just from those lenders who pay them commission.
How much can you borrow?
Mortgages used to be assessed on a very simple income multiple system – you were allowed to borrow up to three times your salary and the remainder had to be covered with a big deposit.
Luckily, those days are gone and mortgage amounts have become a bit more flexible, with the final amount depending on not only your income, but also your essential outgoings and repayment amounts.
The amount that you can borrow varies depending on which lender you choose and their affordability criteria, however, as a starting point, a standard application with typical outgoings will often be granted in the region of around four times your total annual income.
The bigger your deposit, the more flexibility you’ll have when looking for the best mortgage deal. Mortgage providers will require at least 5% of the cost of the property as deposit and typically, the best deals are available to those who can provide at least 15% deposit.
If you only have 10% or less then you may be subject to a ‘Higher Lending Fee’ (a.k.a. HLF, Mortgage Guarantee or Mortgage Indemnity Charge).
Along with the deposit and the actual mortgage amount, the cost of buying also needs to be taken into consideration. Fees can often run into the thousands, impacting how much you can afford, so be prepared to incorporate the following costs into your budget:
- Mortgage Lender Fees – This includes booking/application fees, arrangement/completion fees, CHAPS fees, own building insurance and mortgage account fees
- Valuation – A basic inspection survey to advise on the value of the property
- Building Inspection Report / Structural Survey – This is an optional survey that includes a full inspection of all accessible parts of the property and reports in detail upon everything that can be seen, including things like structural damage, damp and any other major or minor defects
- Higher Lending Charge – If you borrow most of the value of the property (90% or more)
- Legal Costs – Solicitor / Conveyancer fees for undertaking the legal work involved with a mortgage
- Stamp Duty – Paid by the buyer on land and property transactions in the UK, costing between 0 - 7% of the purchase price of the property
- Leasehold rental costs
Freehold vs leasehold property
All properties in England and Wales are either freehold or leasehold, which is a foreign concept to almost all expats, yet it’s a very important one to take into consideration when looking to buy property in the UK.
Freehold – This means that you fully own the property and have full responsibility for the maintenance and repairs of the property.
Leasehold – The vast majority flats in England and Wales are leasehold properties, although some houses are leaseholds too. This means you own the property for as long as it’s specified in the lease and you’re granted the right to live there by the freeholder.
Many leases are originally granted for up to 999 years, but existing leases on properties are usually shorter. At the end of the term, the property reverts back to the freehold owner. The lease stipulates who is responsible for maintaining and repairing different parts of the property and you must also pay a ground rent to the owner of the land (usually a small amount each year).
You shouldn’t buy a property with a lease of less than 60 years and lenders normally want at least 20 years left on the lease after the end of the mortgage term. Leaseholders have the right to extend the lease for 90 years and there is a possibility to buy the freehold but the application process is expensive and lengthy.
Different types of mortgages
There are essentially two types of mortgages available in the UK – fixed rate and variable rate.
- Tracker Mortgage – The interest rate mirrors the movements of the base rate, which is the benchmark interest rate set by the Bank of England
- Standard Variable Rates (SVR) – Set by lenders and each lender has their own, it’s influenced by the base rate but can change independently of it and can vary quite a lot. Borrowers will typically move to an SVR once an initial period on a mortgage ends, however, it’s much less common for banks and building societies to offer SVRs
- Interest rate and thus repayments will be set for a period of time – 2, 3, 5 or up to 10 years. The rate you pay won’t change during this time, but will revert back to the lender’s standard variable rate after the term finishes
Paying back your mortgage
Repayment mortgage (capital and interest) – This is the most common option in the UK, which means your repayments will consist of paying back the capital and interest until your mortgage is repaid in full by the end of the term and you will own the property outright.
Interest-only mortgage – Each month you only pay back the interest on what you’ve borrowed with the full amount of the mortgage owing at the end of the mortgage term, at which point it’s up to you to ensure you have the funds to pay this in full.
These mortgages are becoming much harder to come by as lenders and regulators are worried about homeowners being left with a huge debt and no way of repaying it. Most lenders will want to see evidence at the application stage of how you’re putting money away to eventually pay off the mortgage at the end of the term.
How long does it take to get a mortgage?
You should expect the mortgage offer within two to four weeks, depending on your lender and the type of mortgage you’re getting, and provided you have supplied all the relevant and required information.