British expats have to look longer and harder to find affordable deals for UK house buying. Problems encountered by expats include having to find much larger deposits than UK-based customers, and higher interest rates and arrangement fees. These come on top of the usual hassles of finding and conveyancing a property purchase from a distance.
Lenders may levy early-repayment penalties for expats – making it expensive to switch lenders – and oblige customers to take out life cover and costly in-house buildings and contents insurance.
Research into this market has found that only a few lenders are prepared to offer expats deals on a par with those offered to UK residents. Specialist expat mortgage broker International Mortgage Plans (IMP) now regularly produces a table of the lenders which offer expats the best deals.
It’s important also to know how mortgages work, expat or not. You pay a mortgage back in one of three ways, repayment or interest-only – or a combination of the two.
With a repayment mortgage, every month your payments to the lender go towards reducing the amount you owe as well as paying the interest they charge. So each month you’re paying off a small part of your mortgage. The benefits of this are that it’s a simple, clear approach, and you can see your loan getting smaller.
The downside is that in the early years your payments will be mainly interest, so if you want to repay the mortgage or move house in the early years, you’ll find that the amount you owe won’t have gone down by very much.
As the name suggests, with an interest-only mortgage your monthly payment only pays the interest charges on your loan – you’re not actually reducing the loan itself. This is why it’s very important you arrange some other way to repay the loan at the end of the term; for example, through an investment or savings plan.
If you choose this option you will need to check that your investment or savings plan grows accordingly, so that at the end of the term you’ll have enough money to pay off the loan. If it doesn’t grow as planned, you will have a shortfall and you’ll need to think about ways of making this up, such as by increasing your monthly payments.
The clear benefit of interest-only is that you are only paying off interest and not the loan itself, so your monthly payments will be lower.
But that debt is not going to go away. Throughout the life of the mortgage, you’ll need to check your investment or savings plan is on track to repay your loan at the end of the term. If you can’t repay it at the end of the term you could lose your property.
So, choosing a repayment or interest-only mortgage is one decision. The other will be to choose the interest-rate deal. Here are brief descriptions of the types of mortgage you may be offered:
- Standard variable rate. Your payments move up or down at the lender’s discretion. The lender may not reduce, or may delay reducing their variable rate even if official rates go down.
- Tracker rate. This is a variable rate loan with an interest rate that’s equal to or a set amount above or below the Bank of England or some other base rate. It tracks (moves up or down with) that rate.
- Discounted interest rate. Your monthly payments can go up or down, but you get a discount on the lender’s standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate.
- Fixed interest rate. Your payments are set at a certain level for an agreed period. At the end of that period, they’ll usually switch you to the standard variable rate.
- Capped rate. Your payments are variable and often linked to a base rate, but fixed not to go above a set level (the ‘ceiling’ or ‘cap’) during the period of the deal. At the end of the period, you are usually charged the lender’s standard variable rate.
- Collared rate. This may be used in conjunction with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the ‘collar’).