UK mortgage challenges for expat Brits
Despite their typically wealthy profile, expat Brits seeking to buy property in their home country find themselves choosing from a shrinking pool of lenders. But with the expert help of internationally-focused banks and mortgage brokers, they can still tap into the UK’s buoyant segments and prime locations.
One of the inescapable consequences of the credit crunch has been a much tighter mortgage market. In the UK, for example, gross annual mortgage lending has hovered around £135-£145 billion for the past four years, according to the Council for Mortgage Lenders, down roughly 60% from its 2007 peak of £363 billion. But only recently has that started to present a real challenge to UK expatriates as they seek to invest in property in their home country.
In the closing months of 2012, three of the country’s major sources of property loans closed their doors on mortgages for expats buying in the UK, leaving just a handful of mortgage providers serving the needs of this traditionally wealthy group. Typically, expats buy so they can retain a foothold in Britain for themselves and their families or to invest in a property market which continues to boom in select segments, such as student housing (see Case Study below and prime locations, such as London.
The sticking point for some lenders is these expats’ lack of recent credit history in the UK and their absence from the electoral register and other databases commonly used in financial profiling. After years abroad, most often don’t score well on basic credit checks, no matter how well-off they are internationally.
Most expats often don’t score well on credit checks in their home country, no matter how well-off they are internationally
Most lenders don’t have the level of expertise or the processes to deal with such cases, says Adrian Wright founder and principal at International Mortgage Plans, a specialist in organising residential and buy-to-let mortgages for British expatriate and foreign nationals. “If you don’t tick all their boxes, they simply say no.” He cites a recent example of one client, a UK-citizen and director at a large bank in India, who was turned down by a major lender even though he was willing to put down a 50% deposit on the target property.
Raising finance can indeed be tricky, agrees Jonathan Harris, director of London-based specialist mortgage broker Anderson Harris, with some retail banks unwilling to lend to prospective buyers who are not resident and domiciled in the country. “The only real option for overseas borrowers is the private and/or specialist banks,” says Harris.
Such agents now only have a handful of banks to choose from who appreciate their clients’ needs and take a more sophisticated approach to assessing lending risk. Barclays International Banking, for example, offers a full range of mortgages – fixed rate, tracker, offset and buy-to-let – to expats buying in the UK, as well as to non-UK residents, even when their credit history in the UK is sparse.
But lenders at this level target their UK mortgages at more than just British expats. Many of their international banking customers are also looking to buy property in the UK – as a base for regular visits to the country, for a family member who might be studying in the UK, or simply to rent out. Wright recalls the case of one client from last year, Marco, a 50-year old fund manager from Milan, who bought a £800,000 investment property in London with a £400,000 mortgage.
Marco could have purchased with cash but was advised to take out a mortgage as that would suit his circumstance better. The terms arranged by Anderson Harris were to pay interest at 4.28 per cent – 3.78 per cent above the Bank of England’s base rate – over 10 years, with a 1 per cent arrangement fee. As Marco was not based in the UK, the bank could not rely on UK credit searches so Marco had to provide evidence of personal assets and liabilities, and income/outgoings. The bank also had to satisfy itself that he had enough income to maintain his family’s lifestyle in Italy and also has income or liquid assets to service the mortgage interest against the property in London in case of any rental voids.*
One of the most popular approaches has been to use an offshore company as a vehicle to buy the property. The main advantage of this approach is privacy: the property is owned by the company not the individual directly. One point to note, though, is that for company-owned properties there can be an increased rate of SDLT and an Annual Tax on Enveloped Dwellings.
CASE STUDY: Plugging into study spaces
University student accommodation has been one of the fastest-growing forms of property investment in recent years. In the UK, student accommodation out-performed every other commercial property class over 12 months, according to Knight Frank’s report in 2012. A key reason for this is that there is still a structural under-supply of purpose-built student accommodation in the UK,” says James Pullan, head of student property. “The most under-supplied market is London, and this has been the case for quite some time.”
Put simply, student numbers in the UK – and other European countries – have been growing faster than the supply of housing to meet their needs. And students who were once content with lodging in private houses now expect a much higher standard of accommodation, whether that be an en-suite room, or even their own self-contained apartment in a modern building. This is particularly true among wealthier international students, who make up 33 per cent of all undergraduates in London.
From an investor’s perspective student accommodation offers higher rental yields than other kinds of rental property, mainly thanks to the fact that students are prepared to live in small spaces. There’s another benefit: it’s counter-cyclical, since numbers enrolling as students often increase during economic downturns.
A good example of what you can get for your money is provided by Central House in Jamaica Street in Glasgow, an investment being offered by Property Frontiers. An existing building is being converted into student accommodation into 66 studio apartments, due for completion in summer 2013. For £53,500 you get a 17sq metre studio, which will be let to students and fully managed, with a yield of 9.2 per cent net of all costs assured for the first three years. Students will be offered amenities like a 24-hour concierge and hard-wired broadband, on-site gym, entertainment area and landscaped gardens – all within easy proximity of Glasgow’s nightlife.
But there can often be a very personal stake in such investment planning. Obafemi is a Nigerian banker who bought a student apartment in Manchester last year when his son Samuel enrolled at one of the city’s universities to study engineering. For now, Samuel is occupying the studio, but when he completes his studies, Obafemi will hand the property back to the management company and he expects it to provide a useful source of income as well as giving a small stake in the UK property market. Obafemi has been twice to visit his son, and it’s even possible that one of his three other children may decide to study in Manchester.*
* For security reasons, case studies contain some fictitious details to protect the identities of individuals
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