It is fairly common for people living overseas to want to invest in the British property market, and there can be a number of positives to this as an investment.
While it is certainly possible to purchase homes in the UK as a non-resident or an expat, there are a number of things that buyers will need to be aware of, such as taxes and currencies.
Despite house price falls during the 2009 recession, property investment in the UK remains active, and the UK property market has traditionally been one of the world powerhouses. Due to this traditional strength, many people continue putting their trust and money in the system.
Offshore bank or UK lender for expat mortgage
For most buyers, purchasing British property will mean having to make use of the UK mortgage market. Typically, fees and rates from UK mortgage lenders will be more competitive than those provided by offshore lenders. However, this does vary considerably depending on the current state of the market.
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For property buyers who are not UK residents, it may be possible to arrange finance through an offshore mortgage lender. This includes companies such as HSBC International, Lloyds TSB International or Alliance and Leicester International.
Typically, this market is less competitive than domestic mortgage lenders, and the specialist nature may increase costs and transaction options. Please note that flexible mortgages may not be available through offshore lenders.
In mortgages and property purchases of a considerable size, private banks may negotiate on arrangement fees. Offshore clients with a large net worth may be treated with priority, and this type of premier banking may exceed what is available in the UK.
Managed property purchase
In some cases involving expatriate or non-resident property purchase in the UK, the offshore bank or mortgage advisor will take charge of the mortgage application and purchase process on behalf of the buyer.
This can also apply to the remortgaging, all lease matters and work to the property. Whether a property is managed or not depends on who you decide to take your mortgage with, and the way in which expat mortgage advisors choose to conduct their dealings.
The benefits of managed property purchases are evident in that the buyer’s time is freed from an abundance of contracts and paperwork. Once the property is purchased, managing agents may need to be dealt with if the property is leasehold.
One of the biggest considerations that non-resident buyers have is tax. If the property purchase is part of corporate relocation, tax advice may be available.
However, tax advice is available from a number of firms, including local financial advisers. Getting the right tax advice can save considerable sums when it comes to buying a UK property as a non-resident.
Capital Gains Tax
Expats subject to UK taxation on a UK property are liable for Capital Gains Tax (CGT) at 40 per cent of the property value, when the property is sold. However, there is an exception if the property has previously been your main residence. You are exempt from CGT if you sell within three years of renting to tenants.
If the property has never been used as a main residence, the owner is subject to full CGT for a three-year period.
However, rental income is also subject to income tax, but landlords are able to offset property maintenance costs and mortgage interest costs against income tax liability. Capital is not deductible against tax.
UK tax law can be complex and is subject to regular change, so professional advice is essential.
Currency services for expat mortgages
Currency has a substantial impact on how cost-effective your UK property purchase is. For instance, UK banks may offer lower mortgage rates and charge lower arrangement fees than offshore investment banks and international mortgage lenders. Buyers must decide which currency they wish to borrow in.
When buying a property in the UK as an expat or non-resident, currency is a prime consideration. Currency services are offered by a variety of offshore banks and specialist currency exchanges, and all of these currency services allow non-resident UK property buyers to offset the risk of currency fluctuations between putting down a deposit and completing the property transaction.
This can be particularly acute in the case of off-plan property purchase, where the average property purchase time can rise from between 6-24 months. In volatile markets, even the standard international property purchase time of between 6 and 8 weeks can see considerable currency shifts.
Any property purchase that takes place across borders is subject to currency risk, and if purchased with a mortgage loan every subsequent mortgage payment could fluctuate depending on currency, meaning non-resident buyers have to be very aware of changes.
Furthermore, charges for international transfers of money can soon add up. Specialist currency exchange providers will allow non-resident buyers to automate their payments at a fixed exchange rate for as much as two years.
This type of direct debit transaction may be fee-free, with no commission or charges, but bank charges may be higher. Foreign exchange has two forms: speculative and deliverable. Speculative foreign exchange is regarded as an investment while HM Customs and Excise regulate deliverable foreign exchange.
Interest-only or repayment expat mortgage
Just like a domestic mortgage, buyers outside the UK buying a British property must decide whether they want an interest-only mortgage, or to repay the capital and interest using a repayment mortgage.
The most widely available form of mortgage is a repayment mortgage. With a repayment mortgage, you’ll make monthly repayments for a pre-arranged period of time until you’ve paid back both the capital and the interest.
This means that your mortgage balance will get progressively smaller, month by month, and provided that you keep up with the repayments, your mortgage will be repaid at the end of the term.
You should bear in mind that when you start your mortgage, the repayments will mainly be coming out of the interest amount, so should you decide move house or repay the mortgage in full in the early years, you’ll find that the amount that you owe will not be too different to the starting figure.
With an interest-only mortgage you will only pay the interest due on the amount you borrowed each month. So, while your monthly payments will be less than they would with a similar repayment mortgage, you will still owe the amount you originally borrowed when you reach the end of the mortgage term.
Lenders will make sure you have a repayment strategy in place, so that you’ll have money to pay off the capital at the end of the mortgage. Different lenders will obviously have different criteria for meeting their strategies, but the repayment plan will often mean paying regularly into savings or investments and could include pensions and other properties.
If you do decide to follow an investment plan, the responsibility to ensure that you can pay what’s owed on the capital at the end of the mortgage falls on you, however your lender will also check on this at least once during the repayment period. If the plan is not on track, then it will be very difficult for you to remortgage or get the loan restructured.
It is fairly common for lenders to request a larger deposit amount if you have an interest-only mortgage. If you have a substantial deposit and are considering an interest-only mortgage you may want to get financial advice to work out the best repayment method.
There are a number of lenders who offer mortgages on a part-repayment and part-interest-only basis. This option means that at the end of the term some of the mortgage capital will still be owed and will need to be repaid.
Specialist expat mortgage advice
Offshore financed property purchase can be a complex tax field, and finding a regulated specialist adviser to navigate you through the purchase can make all the difference.
A good advisor should be able to provide advice on tax planning, currency and mortgage lending advice. International specialist mortgage lenders and property brokers may be able to provide specialist advice that lowers tax burdens, ensure a smooth property purchase and strikes a good deal with currency.
Requirements for foreign nationals buying property in the UK
To buy a property in the UK as a non-resident, most buyers require a mortgage. Some UK mortgage lenders will require a work permit, or a permanent right to reside in the UK to consider lending to foreign nationals.
Some lenders will not consider mortgage loans for foreign nationals, while others will be happy to lend residential or buy to let mortgage loans. There are specific mortgage products for foreign nationals and employees who are expected to stay in the UK for a long time.
In these cases, foreign property buyers may be expected to:
Provide proof of right to reside or provide a work permit
Have a permanent work contract and income references
Provide evidence of paperwork showing UK taxpayer status
Reasons for rejection
UK mortgage lenders may reject mortgage applicants if they fall under the following criteria:
Foreign nationals from countries subject to sanctions
Foreign nationals with no credit record or proof of earnings