Expat Mortgages Explained

1. What is an expat mortgage?

An expat mortgage is essentially a legal contract between a borrower, who is a UK citizen or national of another country but who mainly resides outside the UK and is therefore classed as an expatriate, and a lender, usually a UK Bank or Building society who agrees to lend money to the borrower at interest, in exchange for holding title of the borrowers property. When the loan has been repaid in full, the lenders rights to the tile becomes void.

2. Things to consider when picking an expat mortgage deal

When you apply for an expat mortgage there will be certain key features about the mortgage conditions that you will want to carefully consider. Below are some of the more important ones:

Mortgage Term – Mortgage terms can range between a few years to 30 years or more. The longer the term of the mortgage the lower will be your monthly repayments. What you need to remember though is that because you will be paying more interest over the term, the total amount you will need to pay back will be higher.
Interest Rate – The interest rate charged will directly affect your monthly repayment costs with the higher the rate the more you will have to pay.
Fixed rate period – Most new mortgages start with a fixed rate for a period of 2 to 5 years. This means that over that period, your monthly payments will remain fixed. When that fixed period ends your lender will move you to a variable rate which could be much higher than what you were paying.
Other mortgage options – Other possibilities are are tracker rate mortgages where the rate you pay is attached to another rate, usually the Bank of England base rate, where the rate you pay will vary by a set amount above or below that rate and discount rate mortgages where the interest rate is set at a margin below the lender’s SVR for a set period, and during that time it moves up and down as the SVR changes.
Tie in Dates – Where you have a special offer period as with fixed rates, you will usually be locked in to the mortgage during that period. Should you wish to redeem the mortgage during that period the lender may levy charges which can be quite substantial.
Lender charges and fees – Typically, lenders will charge an arrangement fee and possibly a product fee and a fee to have the property surveyed. Often the arrangement fee can be added to the mortgage but of course this will attract additional interest payments.

3. What different basic types of expat mortgages are available?

There are quite a lot of different types of mortgages that will be available for you to consider when choosing which one is best for you. Some of the main ones are briefly explained explained below:

Repayment expat mortgages – This type of mortgage ensures that by the end of the mortgage term, the mortgage will have been completely paid off. Each monthly payment pays off part of the capital while the remainder pays the interest charge.
Interest only expat mortgages – With this type of mortgage, 100% of your monthly payment goes to pay only the interest accumulated against the loan. At the end of the mortgage term you will still owe the lender the same amount as the original loan.

Fixed rate expat mortgages – These mortgages usually start with a fixed rate for a period of 2 to 5 years. This means that over the period of the fixed rate, your monthly payments will remain the same. When the fixed period ends your lender will move you to a variable rate which could be much higher than what you were paying.
Variable rate expat mortgages – With this type of mortgage the rate you pay will be attached to another rate, usually the Bank of England base rate, where the rate you pay will vary by a set amount above or below whatever the attached rate is.
Tracker Rates – This type of mortgage is very similar to the variable rate mortgage described above with the only difference being the attached rate that the lender will use to track.
Discounted rate expat mortgages – Again, this type of mortgage is very similar to the variable rate mortgage described above with the difference being that the lender will agree a set discount that will apply to the attached rate that has been chosen to follow.

Capped rate expat mortgages – This type of mortgage essentially operates in the same way as described for the variable rate mortgage with the difference being that the lender will set a cap on the rate charged. If the variable rate rises above this level the lender will only charge the capped rate.
Offset expat mortgages – This is a type of mortgage designed to suit borrowers who hold cash sums in their bank account. The borrower opens an account with the lender to hold their savings and the lender deducts the amount of savings each month from the outstanding mortgage amount when calculating the interest on the loan. The benefit is that the borrowers savings now attract the same interest rate that is being applied to the mortgage.
Buy to Let expat mortgages – These are mortgages specifically aimed at people who want to invest in property which will be rented for profit. The conditions that apply to applicants are usually very different from normal residential mortgages in that the rental return on the property is normally used by the lender as the basis for giving a mortgage rather than the applicants income from employment. These mortgages are not regulated in the same way as residential mortgages.

4. How are interest rates worked out on expat mortgages?

Where the mortgage is on an interest only basis, the calculation is fairly simple. The lender will take the amount of the loan and multiply it by the applicable mortgage rate and divide that by 12 to give the monthly payment. Where the mortgage is on a capital and interest repayment basis the calculation becomes very complex. We have provided calculators where you can set the loan you require and the interest rate and mortgage term you wish to apply and they will give you for both interest only and capital and interest repayment, what your monthly payment would be. Click on this tab to take you to the calculators.

5. First-time Buyer expat mortgages

First time buyers are defined by lenders to be people who currently do not own a property. In the majority of cases, first time buyers will purchase property at the lower end of the scale and lenders know that the overall housing market in the UK is dependent on first time buyers entering the housing market to ensure the normal function of that market. Without new entrants, house prices across the range would gradually collapse and for these reasons, lenders will usually offer special rates and lower deposit requirements to help first time buyers enter the market. They will also usually allow parents and close family members to assist buy contributing towards the deposit or giving guarantees to repay the loan should the borrower default.

For the similar reasons, the UK government provides a number of schemes to help first time buyers enter the market and although there are strict rules governing applications for the schemes which can make them difficult to obtain, if you are struggling to get onto the housing market then investigating these government schemes could be of real benefit to you. Many of the schemes are under funded and waiting times for acceptance can be long but if this is your only viable way forward, it could be worth making the effort. Please note that these government schemes would not be available to you unless you were returning to live in the UK.

6. Buy-to-Let expat mortgages

Buy to let mortgages are treated as commercial products in that they are not subject to the normal mortgage regulations as set out by the FCA. This means that the borrower needs to carefully consider any mortgage offer that has been made to ensure that it s suitable for the purpose required as you will be limited on what you can do should things go wrong.

People enter the buy to let market for different reasons such as boosting pension income during retirement to building large portfolios of BTL property as a main business, to take advantage of the capital appreciation and income yields normally associated with UK property. The following gives some key information regarding this type of mortgage product.

Lending criteria – Due to the investment nature of buy to let, lender criteria is usually quite different from what would apply to normal residential loans. With BTL, the key qualifying consideration is the level of rent that the property will attract. Lenders will apply a factor to the surveyed rental value and provided this is sufficiently higher than the monthly repayment on the loan, the lender will be satisfied that the borrower should be able to repay the loan.
Deposits – the current minimum deposits that lenders will accept is 25% of the purchase price of the property. Agreeing a higher deposit than this will usually result in a lower interest rate being applied to the mortgage and improve your chance of obtaining a mortgage.
Interest rates – There are a wide range of mortgage products available for buy to let and although generally interest rates will be higher than for residential mortgages, the difference will usually be quite small.

7. Mortgages and Credit Ratings

Having a good credit rating will be critical to your being able to obtain a mortgage at normal rates and conditions. Lenders use experian and equifax credit rating agencies as well as others to obtain a borrowers credit rating. The reports from these agencies will show any defaults that have taken place in the past on any credit facility you have held and they will provide a credit score to show your overall credit worthiness at that point in time. For experian, the score will be out of a maximum of 999 while for equifax, it will be out of a maximum of 700.

Lenders will generally be looking for scores of at least 700 from Experian and 475 for equifax but the higher your score the better will be your chances of obtaining a mortgage on reasonable conditions.

It is always worth checking your score with these agencies before applying for a mortgage as it is not uncommon for things to appear on your report that should not have been recorded there. To get these removed can sometimes take several months and if you apply for a mortgage before doing this, the lender will base their decision on the current score and will be unlikely to accept your word that your score is wrong.

Generally speaking, the higher your score the better the mortgage deal that you are likely to be offered and may reduce the amount of deposit you will be required to put down.

Where you have a low score because of some default in the past, you may still be able to obtain a mortgage but any lender that is willing to do this will probably look for a higher deposit and a lower loan to value ratio and will probably require higher interest rates and higher fees for arranging the mortgage. It is therefore in your best interest to do whatever you can to get the best possible credit score.

In addition to credit scoring, most lenders now use their own criteria for assessing a clients ability to pay back the mortgage. In the past, lenders were mainly only interested in an applicants gross income and would lend an amount based on a multiple of that figure. Now, lenders will look at an applicants lifestyle against their income to ensure that they are sufficient free funds to enable them to pay the mortgage. This can sometimes mean that people who are on quite high incomes but who have a fairly high maintenance lifestyle, may find the amount they would normally be able to borrow being curtailed.

8. What size of expat mortgage can I get?

This is the first question the expat should ask themselves before looking at property. Generally, there are four key areas that will affect the amount of mortgage you will be able to obtain. These are shown below.

Loan to value ratio – This is determined by the amount of deposit you are able to make divided by the purchase price of the property in question.

Your credit score – Lenders look for clients who have a clean credit rating determined by a high credit score. The various credit agencies hold extensive data on all individuals who have accessed credit facilities in the past. You can obtain your credit score from these agencies for a small fee.

Your Income – This is the base level from where a lender will start to consider what they will lend. As an initial rule, many lenders will lend up to 4 times your annual income.

Your cost of living – Regulation now places responsibility on lenders to check that a borrower has sufficient free income to repay the mortgage. It is also important that you as the borrower can comfortably afford the mortgage so that unforeseen events don’t put your home in jeopardy later on. For these reasons lenders will look carefully at how you spend your money and depending on what the find, they may reduce the multiplier they would normally allow on income, restricting the amount you are able to borrow. Note that where part of your income comes from Bonuses or overtime working, lenders may only accept 50%

9. Monthly Repayments

Expat mortgages are usually repaid through monthly payments made by direct debit on your bank account. Where this is the case, the lender will automatically take your payment from your account making any adjustments to take account of interest rate changes.

Lenders use complex calculators for working out the monthly repayment on any mortgage. What they achieve is a steady monthly payment that would apply throughout the term of the mortgage on the basis that the interest rate applied remains constant. Each time the applicable interest rate changes, the lender will recalculate the monthly payments in the same way but based on the amount of outstanding loan.

During initial fixed rate or other special rate periods, the monthly repayments will stay the same over any fixed period but may change where the interest rate is an adjustment to another base rate which can vary.

Expat interest only mortgages – Where the mortgage is on an interest only basis, the monthly repayment you make only covers the interest on the loan that has accrued in that month. The mortgage loan that you took out will remain outstanding throughout the term of the mortgage and will become due to be paid back to the lender at the end of your mortgage term. Most lenders will expect you to have in place some acceptable scheme that will ensure you will be able to pay back the mortgage loan.
Expat repayment mortgages – With this type of mortgage only part of the monthly payment goes to reducing the loan amount while the remainder goes towards paying the accumulated interest on the loan. Because the lender has calculated the mortgage payments to remain constant, the amount of the monthly payment that goes to pay down the loan is very small in the early years but rising over time as the interest element reduces. With this type of mortgage, the loan will be completely paid off at the end of the mortgage term.

10. Loan-to-Value Ratio

The loan to value ratio of a mortgage is the amount of the loan divided by the purchase price of the property, shown in percentage terms. Therefore a loan of £75,000 on a property valued at £100,000 would have a loan to value ratio of 75 percent.

From a lenders point of view, borrowers who are making large deposits towards the purchase of the property or who have a large equity stake in the property being mortgaged, perhaps showing a 50% loan to value ratio, will be seen by the lender as a lower risk than say someone having only a small deposit giving say a 90% loan to value ratio.

As loan to value ratio is a measure of risk to a lender, people with a low loan to value ratio will find it much easier to obtain a mortgage and will be able to obtain the best interest rates on the market. Conversely, those with high loan to value might struggle and will certainly have a much reduced choice from the mortgage products that are available.

With buy to let mortgages, lenders almost universally insist on a maximum loan to value ratio of 75 percent.