Your guide to UK mortgages

Your guide to UK mortgages

Home Housing Buying Your guide to UK mortgages
Last update on December 10, 2018

If you’re tempted by property for sale in the UK, find out what you need to get a UK mortgage as an expat.

Before looking at property for sale in the UK, you should first make a calculation of how much you can realistically borrow and what property prices you can afford. There are no restrictions on foreigners applying for a UK mortgage, but UK mortgage conditions can change depending on whether you are a resident or non-resident in the UK.

Should you buy property in the UK?

Since the UK’s vote to leave the European Union (EU), the weaker pound coupled with record low interest rates has attracted foreign investors to the UK housing market.

UK Prime Minister Theresa May is not expected to start the UK’s EU exit proceedings until 2017, after which they could take at least two years. Until the UK’s exit is officially triggered, uncertainty about future economic realities are expected to keep both interest rates and domestic demand low. New inventory may be harder to come by as UK residents wait out the uncertainties.

The UK’s long-term real estate trajectory, however, has long been upward moving; while properties are as much as 8 percent lower in 2016 in prime locations compared to their all-time highs in November 2015, the UK economy is highly resilient and adaptable. London, for example, emerged out of the economic crisis as a core European housing market, pushing prices up but offering a stable market.

The one area of the residential real estate market that may become less attractive to foreign buyers are buy-to-let properties. New restrictions from the financial policy committee are requiring rental incomes to cover a a greater part of the mortgage. Major banks, including Barclays and Nationwide, have already started requiring that rental incomes cover at least 145 percent of the mortgage payment. This effectively reduces many mortgages on buy-to-let properties to only 40 percent of the value of the property. Read more about buying UK property.

How much can you borrow?

Calculating how much foreign buyers can borrow in the UK may appear more subjective than in other countries. The well-developed UK mortgage system considers each borrower’s circumstances as unique. For instance, a two-income family with several hungry teenagers may be considered to have less borrowing capacity than a one-income family with no children, even if the one-income family earns significantly less.

On the other hand, the UK credit industry is highly competitive and many lenders will work hard to secure your business so it pays to do a comparison of mortgage rates.

In general there are three primary factors that UK mortgage lenders will weigh before making an offer:

1. Your total household income

The general rule is that your maximum mortgage amount is limited to 3x – 3.5x the annual income of a one-income household. For a two-income household the maximum amount is limited to 2x – 2.5x the joint annual income or 3x – 3.5x the larger annual income plus one year’s worth of the lower income.

2. The value of the property

The loan-to-value (LTV) maximum varies greatly between banks; even within a bank the LTV ratios vary depending on the mortgage product and purpose of your investment. This is the amount to which a banker will consider extending your mortgage credit.

In general, LTVs range from 40 percent for buy-to-let properties up to 95 percent for prime first time and ‘next time’ buyers. The critical issue, though, is what your lender thinks the property is worth given its appraisal status, neighbourhood, sale price and the banker’s expectations of where the real estate market is headed. Most mortgages fall into the 60–75 percent LTV range.

3. The lender’s estimate of what you can afford

The final wildcard in calculating how much you can borrow is the lender’s estimate of what you can afford. Here is where consideration of your unique circumstances are weighed, particularly your records of cash inflow and outflow. Your current available assets – particularly cash on hand – will also be considered, depending on the type of loan you are seeking.

UK mortgage calculators

Many online UK mortgage calculators only ask for your income and, after calculating the appropriate multiple, refer visitors to discuss their unique situation with a mortgage lender. However the affordability calculator and the mortgage calculator will help align your borrowing expectations with your lender’s capacity to meet your financing needs. You can also check these lists of banks and financial and mortgage lenders.

Cost of getting a UK mortgage

Interest rates vary significantly based on the type of UK mortgage product, term, and deposit, ranging from an initial base rate of 1.35 percent for a two-year variable rate loan with a 60 percent LTV, up to an initial rate of 4.9 percent for a five-year fixed rate loan with a 95 percent LTV.

But, as with most mortgages in countries with well-developed credit industries, you also need to carefully examine the associated fees – and in the UK there are plenty to consider.

  • Arrangement fee up to GBP 2,000: This is the ‘price’ of the mortgage product.
  • Booking fee GBP 99–250: A non-refundable application fee.
  • Valuation fee GBP 150–1,500: Used to purchase a property assessment.
  • CHAPS fee GBP 25 –50: Charged when funds are transferred to your legal representative.
  • Mortgage account GBP 100–300: Administration costs to set up and maintain the mortgage.
  • Broker Fee averages GBP 500: Pays for your mortgage broker’s advice.
  • Insurance GBP 25: Charged if you want to secure your own property insurance.
  • Higher lending 0–1.5 percent: Usually charged only if you have a small down payment.
  • Early repayment 1– 5 percent: Possible penalty for early repayment.

In addition there are two potential stamp duty taxes which are payable within 30 days of finalising your UK property purchase. The first duty is a progressive tax on any property valued at more than GBP 125,000, with tax rates ranging from 2–12 percent thereafter. The second duty is a flat 3 percent tax on any additional property, regardless of where on the globe your other property(ies) are located. Thus, if you own a bungalow in Spain and purchase a flat (or even a partial interest in one) in London, you will be assessed the 3 percent surcharge on the value of the UK property.

If you sell a property, residents must also pay capital gains taxes within thirty days of finalising the sale (both for rental and non-rental properties). This constitutes a change in capital gains policy since April 2015; prior to this non-residents had no capital gains liability. The good news, however, is that non-residents only need to calculate gains made since the new change went into effect.

UK Mortgages

Tax considerations for UK mortgages

Tax considerations differ between rental and non-rental properties.

For owner-occupied properties, mortgage interest is tax-deductible on UK income taxes for both residents and non-residents (for tax purposes).

The situation is somewhat more complicated for rental properties, which also include if you occasionally let out a single room (for example, through Airbnb). Currently a prorated portion of mortgage expense may be taken as an allowed business expense against your rental income. But starting in the 2017 tax year a new policy will be phased in where mortgage interest will no longer be an allowable expense. Rather, the interest will be considered a deduction against your income tax liability at the nominal rate of 20 percent.

For example, through the current tax year if an owner received GBP 12,000 in rental income and had GBP 6,000 in mortgage interest and an additional GBP 2,000 in allowable expenses, his taxable income from rental activities would be GBP 4,000.

Starting in 2017, however, the calculated tax will be handled differently. Using the same figures as above, the owner’s rental income of GBP 10,000 would be added to total income sources to arrive at a gross tax liability. You would then calculate a reduction of that liability of GBP 6,000 X 20 percent or GBP 1,200 from the gross income tax. Under the new scheme it is possible that the change will push many buy-to-let owners from the 20 percent nominal rate into the 40 percent tax bracket.

Before applying for a UK mortgage

Before applying for a UK mortgage you should check with the three credit reporting bureaus – Callcredit, Equifax and Experian – and ask for a free credit report to make sure there are no reporting errors.

Then you will need to start gathering the documentation your lender could ask for, including:

  • Paystubs from the last three months
  • Form P60 from your employer
  • Three to six months of bank statements, including your most recent statement
  • Proof of any government, pension, or insurance benefits received
  • Two to thre years of verified financials if you are self-employed
  • Tax returns (last year and previous year)
  • Samples of current utility bills
  • Passport or other proof of ID
  • Possibly documentation of your UK residency status
  • Household cash flow statements (indicating cash in and cash out sources)

You will also want to have on hand the contact details for your chosen solicitor. This person will be your legal representative through the conveyance process to make sure your rights are protected and that the contracts are fair for you.

Types of UK mortgages

The variety of mortgage products available in the UK may be astounding to those not familiar with mortgages. Buyers are encouraged to begin their shopping early and to survey a number of different lending institutions – or better yet, seek out the counsel of a reputable mortgage broker with experience in non-resident and expat mortgages.

Basic UK mortgage types include the familiar fixed and variable rate loans with interest and principle payments. There are numerous subsets of these basic types which can be tailored to fit your unique circumstances.

Primary lending institutions for foreign buyers include Barclay’s, HSBC, Enness Private, Skiption International and Nationwide. See Expatica’s listings of UK mortgages providers, banks and financial advisors in the UK.

UK mortgage guarantees

The current UK government mortgage guarantee ‘Help to Buy’ provides incentive to buyers with less cash for down payments. One important caveat with this program is that buyers cannot currently own properties anywhere else in the world. The program is set to expire at the end of 2016.

Tips for getting a UK mortgage

A fact of UK mortgages is that even though the loans may be typically based on a 25 year repayment schedule, the actual terms of a mortgage typically run for only two to five years. On one hand this means there is less chance to lock in long-term mortgage interest rates, and mortgage-related fees may be payable every period. On the other hand, borrowers can stay closer to today’s mortgage interest rates as new mortgage conditions – with an up-to-date interest rate – can be established frequently.

Additionally, as a property is held through successive mortgages, assuming the principle is continuously being paid down, the required borrowing amount should successively be lower, decreasing the LTV and making the mortgage more attractive to lenders. The net result is that your UK mortgage payments should become progressively easier.