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How Will Brexit Affect Expat Mortgages?

When a majority of the citizens of the United Kingdom voted for Britain to exit the European Union on June 23, 2016, it created a huge amount of uncertainty around the political and economic landscape of the future, not just across among the member nations and the continent, but all over the world. This was evident in the way the Pound Sterling got significantly weaker in the days that followed the referendum. Many foreign investors put a complete halt on their business activities in the UK so that they could carefully assess the situation as well as the potential risks they may incur, which subsequently had an adverse impact on the economy.The UK is home to a huge expat community and a large percentage of the foreign residents are from the EU nations. A number of them have decided to look for other places to settle down after the “leave” vote, as their future in Britain appears uncertain. Many of those who do plan to continue living there are feeling apprehensive about making any kind of monetary investment in the country, which includes purchasing property and applying for a mortgage.

Beyond the British bubble, it is actually business as usual for most of the investors that are making purchases in the UK real estate sector. Within a few weeks after the Brexit vote, the lending industry even saw a number of new players making their entry into the country’s property markets.

This is all the more true for British expats who are interested in UK mortgages. It is therefore safe to say that nothing has changed much. An expat’s ability to secure finance remains more or less the same and consumers still have access to all the same products as well as plans related to mortgages as before. While other aspects may be unclear, there is a certainty that the base rate will remain low for the foreseeable future, along with an imminent reduction.

In fact, many experts are of the firm opinion that investing in real estate has always been looked at on a long-term basis, rather than temporary situations or sentiments, which can be volatile. The more serious investors therefore look at the abovementioned conditions as a “buying signal”; they are likely to purchase property in the imminent future. Since the exit vote, Liquid Expat Mortgages has actually seen an increase in enquiries from expats in the United Arab Emirates and Hong Kong. Many people have been incentivized with the immediate purchase advantage of converting their overseas incomes and savings, because of the weakened pound.

Either way, there is a strong demand for residential properties in the UK and from a mortgage perspective, the market fundamentals haven’t undergone any major negative change. The outlook is also closely echoed by the lenders accessing the expat mortgage sector. Interestingly, Bank of England have loosed adequacy controls over banks by a bit, to encourage them to increase lending to local as well as expat borrowers.

Prospective opportunities and long term changes

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Immediately after the EU Referendum, the value of the Pound Sterling crashed against the US Dollar. Fortunately the UK is the 5th largest economy across the globe. Today, it has a much stronger infrastructure than it did back in 2008, when it weathered the banking crisis. This country will therefore continue to remain a hotspot for local and international investors, who have the ability to take advantage of the weakened pound.

The drop in the value of the Pound Sterling was a welcome relief for the expats who get paid in currencies linked to the US Dollar. It meant a significant boost in their spending power for buying real estate in the UK as the prices seemed discounted. Since the Brexit vote the Pound is down by around 10% against the Dollar; this means that an expat purchasing property in the UK for £ 150,000 would be saving £ 15,000, given the new scenario. People are further anticipating a cut to interest rates, which will put additional pressure on the value of the Pound, consequently reducing mortgage rates.

Because the UK was a part of the EU several different factors influenced, or rather limited, finance and lending across the country. For example, In March 216, the UK’s expat mortgage market saw increased regulation of currency as the EU Mortgage Credit Directive (MCD) was put into effect in order to monitor all related activities in the member states. This has resulted in a reduction of competition as some of the leading mortgage lenders, like Halifax and NatWest, withdrawing from the mortgage market. However, as an independent state, the UK will no longer be under any obligation to comply with such a stringent framework. The Financial Conduct Authority is good enough for the regulation of lending. In the long run, this will encourage competition and give the consumers more choice. Finance is therefore likely to be more accessible to potential expat investors.

The role of the Mortgage Credit Directive

Of course, no one can deny that the MCD offers solid technical benefits to expat mortgage owners as it protects the consumers from drastic currency fluctuations. If an exchange rate crisis occurs, this entity compels the lenders to provide assistance to the investors. With an expat mortgage, the directive of the MCD states that when the exchange rate between the two relevant currencies undergoes a change of 20% or more, the lender has to offer the consumer a choice of switching and paying the outstanding mortgage payments in the currency of their earnings or used by their current country of residence. The downside to this is that the lender is expected to bear the brunt of the loss (which is why some of the key players have quit).

In order to follow the MCD, lenders in the UK have to be prepared to offer loans in other currencies in addition to the Pound Sterling. Unfortunately, only the big players have the bandwidth to do so. The lenders that don’t have the required infrastructure have no choice but to stop conducting their business in the international expat market. The mortgage departments of Nationwide and Lloyds are reported to have ceased considering income earned overseas. Some analysts are of the opinion that the MCD has driven financial lenders out of the international mortgage market, which has in turn reduced competition. If this trend continues, interest rates will probably increase for UK expats. Brokers agree that an MCD-free property market, coupled with more balanced financial regulations, will lead to a higher number of lenders offering expat mortgages.

The impact of credit ratings on expat mortgages

According to speculation, Brexit was expected to have a negative impact on UK mortgages, based on two theories. The first was the weakening of the Pound Sterling, which did indeed come true.

The second theory is centered on the credit rating of the British Government. In general, rating agencies were not in favor of the UK leaving the EU. Analysts said that for the country to be in its prime economic state, there would be too much trade to renegotiate within a short span of time. In the first part of 2016, Moody’s Investor Service, one of the leading global credit rating provers, indicated the possibility of a dip in UK’s credit rating score, from AA1 (Stable) to an AA1 (Negative Outlook) in case of a Brexit. The UK’s bonds would be expected to pay a bit more because of a downgraded credit rating. Without a doubt, this would have an impact on interest rates on lending.

Applying for a mortgage

In the last decade, Great Britain has seen severe recession, which has affected the finance industry negatively. Since the collapse of the UK housing market, mortgages have been a sensitive topic in the country. The restrictions have become very strict and there is no guarantee for an application to be approved.

As a foreign national, you can apply for a mortgage at a bank or a building society. Please keep in mind that while lenders claim to offer financial packages designed specifically for expats, the procedure is extremely complicated. Some of the basic information that you will need to provide, to initiate the process includes your credit rating, financial status, purchase history, and reason for investing in the UK. If you are in the UK as a student or on a work permit, the bank isn’t likely to regard your case favorably. Expats who have had a job with a company for several years (in the UK or overseas) are more likely to be regarded as financially stable applicants.

Typically, the mortgages approved for expats are no more than 85% of the value, which means that you will need to pay 15% of the purchase price as down payment. In the case of a remortgage you may get only around 80% of the loan to value.

The entire procedure could take two to three months as there are several steps involved, from the time you fill out the forms and submit the documents, to the underwriters and solicitors completing their jobs.

Before applying for a mortgage, seek clarification about all the charges that you will need to pay beforehand. Since March 2016, all lenders have been required to include any mortgage-related fees (like redemption charges and valuation fees in the calculation of annual interest. This method of calculating interest is known as Annual Percentage Rate of Charge (APRC). Mortgage fees have been broken down into 3 categories: Legal, Lender, and Broker

Legal fees include stamp duty, search fees, and solicitors’ fees. You will be required to engage an attorney to get all the paperwork in place and ensure that you are adequately represented.

The lender’s fees cover the arrangement, booking and valuation fees. The mortgage company will carry out a survey or of the property you are planning to purchase, to make sure that the price you have quoted is within the valuation bracket. The appraisal is one way to ascertain the loan amount a lender will be willing to offer you. The amounts for these fees will vary greatly from one lender to another and could also include a few legal costs.

In the UK, almost all property sales transactions involve middlemen on both sides. The broker’s fees are charged by these representatives, i.e., the buyer’s agent and the seller’s agent. The broker will have to set charges for all the administrative work as well as the other activities they may be involved in. The amounts could therefore be variable.

All costs that are related to mortgage products should be outlined in a mortgage illustration document, which is often referred to as the European Standard Information Sheet (ESIS). This is an enhanced “Key Fact Illustration” and it contains supplements of any additional information that may be required.

Insurance requirements

There is no law in the UK making it mandatory for an individual to have content and building insurance, unless you plan to let the property. Content insurance may be required by the landlord in a letting scenario, where you are renting the premises. Your homeowner’s insurance will also come down to whether you have a mortgage on the property or not. The mortgage lender will ask you to either purchase insurance from them or buy a policy from another company.

Purchasing property anywhere is a big decision and it is essential to seek expert advice, preferably from a lawyer, before making any final choices. This is all the more important when you are planning to make a financial investment in a foreign country.

Sources: [1], [2], [3]

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