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Buying UK Property Just Got Tougher For Expats

Expat Briefing Editorial Team
21 May, 2014


If you are an expatriate or international property buyer, securing a UK mortgage has become more difficult as a result of the mortgage market review, with a new set of regulations being implemented by the Financial Conduct Authority (FCA).


Background: Mortgage Market Review

The new rules introduced under the Mortgage Market Review (MMR), most of which came into effect on April 26, 2014, are intended to increase protection for borrowers. Drawn up in 2009, the changes make lenders responsible for conducting thorough affordability checks.

The more stringent affordability checks, along with a "stress test" to determine whether an applicant can repay the loan if interest rates increase over a five-year period, mean that there is expected to be an increase in the number of applications being rejected.

Borrowers will need to provide more detailed information on their spending habits when applying for a loan, and the application process will take longer.

However, the new rules only cover mortgages where applicants are using their own home as security for the loan. They do not cover buy-to-let mortgages or second mortgages.

A summary of the new rules follows below.


Intermediaries

For intermediaries, the MMR rules mean:

  • The removal of the requirement on intermediaries to assess affordability.
  • The removal of the non-advised sales process.
  • Most interactive sales (e.g. face to face or telephone) to be advised.
  • An 'execution only' sales process for non-interactive sales (internet and postal).
  • Every seller to be required to hold a relevant mortgage qualification.
  • It is no longer compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they want to). Instead, certain key messages about a firm's service must be given to customers.
  • The Key Facts Illustration (KFI) doesn't have to be given every time the firm provides the customer with information about a product that is specific to them.  Instead, it is only required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want in an execution-only sale.


Lenders

For lenders, the MMR rules mean:

  • Lenders are fully responsible for assessing whether the customer can afford the loan, and they have to verify the customer's income. They can still choose to use intermediaries in this process, but lenders remain responsible.
  • Lenders are still allowed to grant interest-only loans, but only where there is a credible strategy for repaying the capital.
  • Lenders are allowed to provide a new mortgage or deal to customers with existing loans who may not meet the new MMR requirements for the loan under transitional rules. The borrowing is not able to exceed the amount of their current loan, unless funding is required for essential repairs. The decision on whether or not to lend in these cases remains with the lender.


Borrowers

Prospective borrowers need to provide evidence of their income in support of their mortgage applications. If you are employed this might mean showing your payslips. If you are self-employed or a contractor, you might have to show your tax returns, accounts, business plan or projected earnings. If the income you will use to cover your mortgage payments comes from more than one job, you will usually need to show evidence for each job. For other types of income, like shares, bonuses or a pension, you may have to provide documents proving how much you receive. You will also have to tell your lender if you expect your income to go down or your outgoings to go up.

Evidence needed for each type of income will vary from lender to lender. However, whatever evidence they ask for, lenders will have to ensure that your income covers your mortgage as well as basic spending. This means that questions regarding your spending habits could become a lot more personal!

Under the new rules, lenders will look at your spending in three categories, as follows:


Essential Expenses

This is what you regularly spend on the things you cannot do without, such as:

  • food
  • household cleaning and laundry
  • gas, electricity and other heating costs
  • water bills
  • telephone
  • essential travel (such as travel to work or school)
  • council tax
  • buildings insurance (it is usually a condition of your mortgage that the building must be insured)
  • ground rent and service charges (for leasehold properties)


Basic quality of living costs

This is what you need to spend on occasional essentials, with some allowance for leisure costs, including:

  • clothes
  • household goods (such as furniture and appliances) and repairs
  • personal goods such as toiletries
  • basic leisure costs, including non-essential transport
  • TV licence
  • childcare


Repayments and other commitments

This covers other payments you know you will have to make, including:

  • debts you are paying off, like credit card bills, loans or hire purchase payments
  • child maintenance and alimony payments

The exact details you are asked for will vary between lenders, but you should expect to discuss your regular spending in all these areas.


Interest-only mortgages

If you want an interest-only mortgage, the lender will also ask you to explain and show proof of your plan for repaying the full loan when the interest-only period ends. The lender will check that your plan is still in place at least once during the interest-only period.


Future affordability

Your mortgage lender will look at how interest rates are predicted to change over a minimum of the next five years, to see how they might affect your mortgage payments. If your payments are likely to go up, they will check that you could still afford them if your other outgoings and your income stayed the same.


Paying your mortgage after you retire

If your mortgage is due to last until after you retire, your lender will check you will be able to afford your payments with the income you expect to have then. The information they need about this will depend on the lender and how long it is until you expect to retire.


Changing an existing mortgage

If you already have a mortgage and want to remortgage, a lender may be able to arrange this without doing all the affordability checks. The lender will still have to do the checks if you are increasing the amount you are borrowing or making a change that might affect what you can afford (for example, extending a mortgage into your retirement, or removing someone from the mortgage contract).


Expats and International Buyers

The MMR will make applying for an international mortgage more time consuming and more complex and prospective buyers will find the amount of information they now have to prepare has risen considerably. However, it is only likely to really impact those buyers who are at the margin of what they can really afford, so the solution for that small group will be to trade down slightly.

Tim Harvey of international mortgage brokers Offshoreonline.org does not think it will make a huge difference to the market. "Offshore lenders have in practice been applying an affordability based model for at least a year now and it is certainly not unusual to stress test loans to 7%. That is not to say we expect to see mortgage rates at this level in the near future, though. As base rates do rise, lenders will have to look at their margins which in some cases are nearly 4.90% – compare that to the positioning in 2006-2007 when lenders would expect to make 1%-1.5% over UK Base at the most, so as you can see, there is plenty of room for competition to re-enter the market."

Top tips for prospective buyers are all common sense. Make sure your current account is in order and showing at least three months in credit, before you start an application – lenders still do not like to see evidence of accounts being overdrawn, as it suggests expenditure is outstripping income. Make sure too that you have up to date statements for all your other accounts and as an expatriate, don't forget that subsidised accommodation and paid flights home can all be counted towards income.

Expatriate buyers should budget on a deposit of 25% for buy to let deals. Banks are often reluctant to lend on ex local authority and low value properties, but expatriate and international UK mortgages are now easier to come by than they have been at any time in the last five years.




 

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