Why pay cash for a luxury home in the U.K. when you can borrow to buy one instead?
Banks in the U.K. are prepared to lend million-pound mortgages to wealthy foreign borrowers in the market for a home in the U.K. This is the case even if you are not a British citizen, do not have a U.K. income, are not domiciled in the U.K. and have no permanent right (or even plans) to reside there.
So what’s the catch? Here’s your guide to navigating the U.K. mansion mortgage maze:
If you want to borrow over £1 million to purchase a residence in the U.K., lenders will typically require a deposit of 35% to 40%. This is likely to increase to 50% if you are borrowing over £5 million, according to onlinemortgageadvisor.co.uk.
However, you may be able to borrow up to 80% of the value of the property if you’re the “right borrower,” said mortgage broker Andrew Montlake, a director at Coreco. Private banks see mortgages to high-net-worth individuals as an opportunity to build a “holistic relationship” with you, servicing both your borrowing and investment needs.
“When you look at the high-net-worth territory, most things are achievable with a private bank,” said Peter Gettins, product manager at L&C Mortgages, a broker. “They look at borrowers on a case-by-case basis.”
This not only impacts how much the bank is prepared to lend to you—if you’re a borrower the bank is “particularly comfortable with,” you may also be offered a lower interest rate, Gettins said.
Many borrowers for these large mortgages choose 15-year terms, but lenders may be willing to offer terms up to 40 years on a case-by-case basis.
Typical interest rates are in the region of 2% to 2.5% above either the Bank of England Base Rate or the London Interbank Offered Rate (Libor), according to Private Finance, an independent mortgage broker.
The Bank of England base rate is at a historic low of 0.5%, and has been static for more than five years. Economists expect a hike to 0.75% in spring next year, with some predicting an increase to 2% by the end of 2017. For this reason, it may be worth opting for a long-term fixed rate, even if this is more expensive than a variable rate.
Lenders will typically charge an arrangement fee of around 0.5% to 1% if you are introduced to them via a broker.
Although you can potentially cut these fees in half if you go to the lender direct, a good broker will negotiate with the lender to reduce both the fee and the interest fee. “It is often cheaper to utilize the services of a broker even with the addition of the broker’s fee,” said Edward Checkley, a partner at Private Finance. “For example if we charge 0.5% of the mortgage amount but are able to reduce the lender’s fee by 0.25% and the margin by 0.5%, then the saving over 5 years will be 2.25% to the client.”
Lenders in the U.K. are usually willing to cater to high-net-worth borrowers who prefer interest-only mortgages. These loans allow borrowers to only pay the interest, rather than the capital, until the end of the mortgage term when the capital must be repaid.
Lenders take this approach, Gettins says, because they understand that the cash that will be your repayment vehicle may be tied up in shares or other investment portfolios—which you may “very reasonably” expect to perform better than paying the loan off.
However, if you do opt for an interest-only loan, you should expect the bank to reduce the amount they are willing to lend as a proportion of the value of the property. Coutts, for example, will lend up to 80% on a capital and interest-only basis if you are borrowing £2 million, but only 70% if the entire loan is interest-only—and other banks are even stricter.
You will be expected to provide detailed evidence to the bank of your assets and liabilities, expenditure and credit history, as well as explaining the purpose of your purchase, said Rupert Swetman, head of mortgages at Which? Mortgage advisers.
Banks will also want to see proof of your net income. If you are self-employed, you may need to provide up to three years of your accounts. However, the banks will also typically accept a certificate or letter from a well-known foreign accountant, and are particularly happy to do this if that accountant is from one of the top six global firms, said Montlake.
You will usually be allowed to borrow only up to four or five times your income, so you will need to earn at least £200,000 to borrow £1 million.
While most private banks are happy to lend U.K mortgages to foreign nationals, each bank has its own rules about the nationalities they are prepared to lend to.
Some nationalities create a tax or regulatory headache for U.K. lenders—for example, in order to lend to Australians anywhere in the world, lenders must hold an Australian banking license, said Checkley. Ahli Bank and Investec are lenders that may be able to help Australian borrowers in the U.K., he said.
Meanwhile, the IRS in the United States expects banks lending to Americans to carry out extra checks on their worldwide income and make additional reports on assets kept under the bank’s management. “Particularly if you’re American looking to borrow in the U.K., I’d recommend speaking to a good broker who is familiar with the banks that will accommodate international clients—because although it’s more complex if you’re from the States, it can be done,” said Checkley.
Bear in mind that, if you are a national of a country within the European Economic Area, you have an automatic right to reside in the U.K., so will not usually have a problem getting a U.K. mortgage.
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