As Article 50 is triggered and Britain begins the long process of leaving the European Union, the top concern in the minds of ordinary people is the effect of these macroeconomic machinations on their personal finances, and especially on their mortgages and home values. For foreign investors who seek a buy-to-let investment, these concerns loom large as well, as do new rules concerning Stamp Duties and tax deductions. While this period of uncertainty may be intimidating for some buyers, significant silver linings can be found that indicate now is as good a time as any for foreigners to invest in British property and reap the rewards when the dust settles and values rise.
The first question for potential foreign investors, including expats, is how they can qualify for a mortgage in the United Kingdom. Unlike some other countries, the UK does not have special restrictions on who the banks can lend to based on citizenship. Rather, if you have the required paperwork and the bank can determine that you’re capable of paying back the mortgage with interest, you can be approved. In order for them to make this decision and lend to you, you’ll need the following:
- Several months worth of bank statements (3-6 months, including most recent)
- An employer-issued P60 form (how much you’ve earned)
- Paystubs for previous 3 months
- If self-employed, proof of financials for previous 2-3 years
- 2 years worth of tax returns
- Passport and other proof of ID
- Credit check
- Potentially other documents, such as utility bill, government benefits or insurance received, or household cash flow statement
In the UK, a potential buyer would need to hire a conveyance solicitor, who will represent you and make sure you are treated fairly and legally in the home-buying process.
Now that you know what you’ll need to apply for a mortgage, the next question is how much can you expect to borrow from the bank? In the UK, the lending industry is highly competitive and firms will work hard to provide a qualified borrower good terms, yet some rules of thumb are generally followed:
- For single income household, the maximum loan amount is about 3-3.5x your annual income
- For a 2 income household, the maximum loan amount is about 2-2.5x your joint annual income
- The LTV range usually falls between 60-75%, although it could be lower for buy-to-let investors. Thus, expect to provide a down payment of 25-40%.
However, keeping all of this in mind, lenders in the UK tend to consider each buyer’s individual circumstances and don’t simply approve or deny loans like automatons. Your cash flow, available assets, and cash on hand can all significantly influence the terms you’re offered.
Finally, the very best part of the real estate purchasing process are the associated fees and taxes that come with buying a home in the UK. Between arrangement fees, booking fees, broker fees, valuation fees, mortgage accounting fees, and insurance costs, expect to pay an extra GBP 2000 – 3000 upon purchasing the property. Ahh, the joys of homeownership, right?
Further, there are two stamp duties (taxes) that come with purchasing real estate in the UK. The first is a 2-12% progressive tax on any property valued over GBP 125,000. The second is a flat 3% tax on any secondary property. If you are an investor looking to buy real estate to rent out and already own a residential home somewhere else in the world, even if it’s just a shack in Thailand, you’ll need to pay this tax as well.
As of 2017, new tax laws change the tax structure of rental income, adding it to other sources of income for a gross taxable income, thereby having the effect of pushing some landowners into a higher tax bracket. From this can be deduced 20% of the cost of mortgage interest from the gross income tax.
So Why Invest?
After all those taxes and fees, you may be wondering if investing in British real estate now is still a good idea. The answer depends on your particular situation, but for many investors, it is still an overwhelming yes. The uncertainty created by Brexit has had its effects on the market, with house price growth in London now at its lowest since May 2013, according to Hometrack. However, as is usually the case with real estate, a temporary decline just precipitates the next rise, and growth is expected to increase in the future, as the chart indicates.
Home prices are expected to continue increasing, and even if there is a fall, history tells us that they will only rise again, given enough time.
All of this as rental prices continue to increase at a consistent rate and interest rates for foreign and expat mortgages remain relatively low at 3.53% – 4.24%, according to Offshore-Online makes for plenty of good reasons for foreigners to invest in UK real estate.
While laws and governments change, the iron laws of real estate tend to remain constant: property values tend to rise, rents tend to rise, and it’s best to buy when interest rates are low and prices are at a low. In other words, now. For help in obtaining a foreign mortgage from initial inquiry to final signature, contact Crossborder for free and learn what options are available.