Globalisation, a burgeoning international jobs market and favourable exchange rates have led to increased demand for expat mortgages in the UK.
Although this remains a relatively small part of the overall mortgage market, lenders report that it has shown resilience in recent years despite the pressures of Brexit, Covid and the ongoing cost-of-living crisis.
This resilience has encouraged more lenders into the sector, with those already active expanding their product range to tap into new opportunities.
Applicants need to get their ID notarised
in their country of residence
John Squires, a managing consultant with specialist broker Liquid Expat, says profit margins in this sector can look attractive to lenders, particularly with the domestic market stalling over the past few years. Expat mortgages, he says, typically have higher rates than those of standard UK mortgages but also have relatively low arrears.
According to mortgage sourcing platform Criteria Brain, there are 10 lenders offering residential mortgages to UK expats looking to buy in the UK, and around 30 lenders offer expat buy-to-let (BTL) deals.
Many of these are regional building societies and specialist lenders, although larger lenders such as HSBC and Nationwide also operate in this area. HSBC, for example, recently allowed brokers to place expat BTL mortgages.
Typical borrower
Brokers say the typical expat borrower is a professional working for a large multinational, often in the IT, finance or energy sector, with a stable, high-income job.
Most applications come from those working in the Middle East — particularly Dubai and the UAE — or in Australasia, Europe or the US, although specialist lenders such as Dudley Building Society point out that they cover expats across the globe, with Dudley having arranged mortgages in 160 currencies.
We take a 20% haircut on their salary, in case of a swing in currency valuations
John Charcol mortgage technical manager Nicholas Mendes says many of these expats will seek to return to the UK eventually and do not want to be priced out of the housing market in the interim; some will also return for extended periods each year.
Many expats also regard the UK housing market as an attractive investment opportunity and are looking to take advantage of good exchange rates and the potential for increases in property value.
Some want to arrange residential mortgages, others BTL or holiday-let options, to generate an income while they are overseas. Brokers report quite equal demand for residential and BTL loans.
Mendes says: “We also see professionals moving their families to the UK for better education and quality of life while they continue working abroad.”
Dudley BS director of distribution Rob Oliver says: “We recently arranged a mortgage for a client who is purchasing a property in Southampton, where his son is attending university and living with three other students. This scenario is quite common.”
Two years ago, around 90% of our business was with specialist expat mortgage brokers. Now they make up only around 60%
Lenders won’t offer mortgages to expats in all jurisdictions. There is generally a blanket ban on those residing in one of the countries listed by the Financial Action Task Force as failing to comply with international standards on issues such as money laundering. This list, which is updated quarterly, includes Iran, North Korea and Russia — but also currently Turkey and Vietnam.
Outside this, there is some variation in lender coverage.
Stephen Kerr, co-founder and director of brokerage Kerr & Watson, says: “Some don’t offer expat mortgages to those based in the US or Australia — although others do.
“Lenders don’t always make it clear why certain countries are excluded, but it can be because of perceived difficulties in pursuing action should the borrower default.”
Kerr says many expat cases he deals with involve clients looking to refinance a property in the UK.
“Often this turns out to be more complex than the client initially anticipated. There can be challenges, particularly when we see some clients looking to raise additional finance on their property, perhaps for further UK investment or to purchase where they currently reside.”
Human underwriters are essential due to the additional complexity of the case compared to other mortgages
Kerr says homeowners typically speak to their existing mortgage lender when first moving overseas.
“Often there are no problems raised at this stage, with clients continuing to make repayments on their existing product. But, when they need to remortgage, they can find their current lender does not offer expat loans, which is why they then contact us to discuss options.”
Affordability
Affordability can be an issue, adds Kerr, with lenders not taking an expat’s full income into account when calculating borrowing limits. Penrith Building Society, for example, uses 80% of an expat’s salary in its affordability calculations.
Penrith BS head of product development and distribution Tim Vigeon says: “We essentially take a 20% haircut on their salary. This helps ensure repayments remain affordable should there be a sudden swing in currency valuations. These mortgages will be arranged in sterling, but the client may be getting paid in dollars, yen or dirham.”
Brokers’ expertise ensures a smooth and efficient mortgage process for expat clients
He adds that most lenders take a similar “belt-and-braces approach”. While some brokers say this can create affordability hurdles, others believe it is not a pressing issue for most expat clients.
Figures from Dudley BS show that the average expat loan-to-value is around 58% — indicating that many clients are able to afford a substantial deposit.
Squires points out that those moving overseas often do so to take advantage of higher salaries, which in many jurisdictions are paid tax free. This can mean they are in a better position when buying property in the UK.
He adds that this ‘20% haircut’ on income is not an issue with BTL loans, where affordability is based on expected rental income.
However, Kerr says affordability can still be an issue with BTL loans.
“A main challenge is meeting the rental stress tests when the rates are high and customers need a higher-LTV loan,” he says.
When they need to remortgage, they can find their current lender does not offer expat loans
“If this is a purchase, it may be less of an issue as they could choose a lower-priced property or wait/save. But the problem that I see is when the property was an old residential at a higher LTV, they have moved abroad, let the lender know, got consent to let and the product has now expired.
“This can cause problems getting the amount needed to repay the loan. In some instances, it can result in an offering of 50%-60% LTV. This can create mortgage prisoners who may not have been expecting that when they made the move.
Premium products
Many expat lenders offer lower LTVs on both residential and BTL products, when compared to equivalent mortgages for UK residents, although this is not universal. They may also charge higher rates and fees than on equivalent mortgages for UK residents.
Lenders don’t always make it clear why certain countries are excluded
Squires says that, on paper at least, expat loans are higher risk, particularly when pursuing applicants for defaults. In fact, however, manual underwriting, additional borrowing requirements and better affordability across the sector mean that arrears are low.
Among typical LTV rates, Dudley BS offers up to 85% LTV on its expat residential range, with one exclusive 90% LTV option, and 80% LTV on its expat holiday and BTL range.
However, Penrith BS offers a maximum of 80% on its expat residential deals and 75% on its BTL range — both consistent with its UK book of business.
There can be criteria differences too. Penrith, for example, offers top slicing on its expat BTL range, but not all lenders provide this facility.
There are other options, however. Oliver says Dudley BS can provide full affordability assessments for BTL mortgages.
“This approach has proved successful, particularly when the interest coverage ratio criteria are not met but the client’s overseas income is substantial,” he adds.
These mortgages will be arranged in sterling, but the client may be getting paid in dollars, yen or dirham
The various criteria, rate and LTV differences underline the need for broker assistance when sourcing expat deals. The sector is largely broker led due to the complex nature of these transactions, and many lenders are intermediary only.
Administration
Mendes says: “Brokers are essential in handling administrative tasks, such as verifying overseas income, facilitating communication between stakeholders and meeting stricter documentation requirements.
“Their expertise ensures a smooth and efficient mortgage process for expat clients.”
Squires points out that this administration can be significantly more arduous than with a UK-based client. To qualify for an expat mortgage, clients need a UK passport and to still have a UK bank account — although he says there may be cases when this can be set up as part of the financing arrangements.
Kerr adds that the factfind and verification process is necessarily more involved.
“Applicants need to get their ID notarised in their country of residence and it can make the process a bit more tedious versus taking a mortgage from the UK. Brokers can help by making people as clear as possible about the process so they know what to expect on the journey.”
Many expats will seek to return to the UK eventually and do not want to be priced out of the housing market in the interim
Many specialist lenders manually underwrite these mortgages.
Oliver says: “When dealing with expat cases, human underwriters are essential due to the additional complexity of the case compared to other mortgages.”
Lenders, he adds, need to properly assess the value of the documentation they receive.
Another potential hurdle is that documents showing the borrower’s salary, what rent they may be paying overseas and the details of their utility bills or other regular outgoings may all be in a language other than English.
Oliver says: “We have translation services but, because we have been in the expat market for quite a while, we are comfortable with a lot of countries and are familiar with how their processes work.”
Kerr adds that factors such as the length of time people have been overseas and their ‘footprint’ in the UK may also be taken into account in this underwriting process.
Some lenders don’t offer expat mortgages to those based in the US or Australia
“Lenders clearly prefer to offer finance to those who have more distinct links to the UK,” he says.
Not all brokers are set up to deal with expat mortgages. Many may not have in-depth knowledge of the market, and a lot of networks will not allow them to conduct this business.
For directly authorised (DA) brokers, Kerr says there can be issues with professional indemnity insurance. But specialist brokers such as Liquid Expat will take referrals and pay commission on this business.
Changing dynamics
Despite these hurdles, however, more brokers are looking at this sector.
Oliver says: “Two years ago, around 90% of our business was with specialist expat mortgage brokers. Now I estimate that specialists, including packagers, make up only around 60%.
Lenders clearly prefer to offer finance to those with more distinct links to the UK
“We are seeing more DA and appointed representative brokers transacting directly with us. They still have the option to go through packagers, however, and these packagers continue to play a huge part in this market.”
Demand for expat mortgages seems set to remain stable. With more lenders and more products increasing competition, opportunities are opening for more brokers to provide this extra service.
This article featured in the July/August 2024 edition of Mortgage Strategy.
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