Expat Mortgages for the UK 1

Expat Property-Guy 

Hello there, and welcome to Episode 16, the second part of our expat mortgage extravaganza with Simon Allen of Searchlight Finance. Before we go back to 2018 to catch up with my Expat Property Story, I just want to remind you that if you’re looking for a buy to let  or an HMO mortgage or bridging finance and you want to speak to a broker, whether you’re an expat or not, I can highly recommend Simon who has been my broker for a few years now and Simon has generously offered a 20% discount on his fee if you use the code EPS1, That’s E for Expat P for Property S for Story 1. EPS1. You can find Simon at www.searchlightfinance.co.uk and all his contact details and links etc. can be found in the episode show notes. And just to repeat what I said last week, I get no commission or finder’s fee from any of my guests, but in the spirit of full disclosure, Simon will not be charging me the next time I use his services. Podcast downloads are increasing week on week, far beyond my expectations when I started this podcast so thank you if you’ve been with me from the start and if you’re here for the first time, you’re most welcome. For the full version of my Expat Property Story, you can go back and listen to all the previous episodes, but to sum up, my wife and I have cashed in most of our pension, we’ve re-mortgaged our London property and we have a funds of around £250,000 which we’re going to spend on student HMOs. We’ve found someone to help us source, refurbish and manage HMOs in Nottingham and now it’s just a matter of waiting for him to find a suitable house to convert to an HMO and work out the best way to allocate our funds. Should we buy it with cash and borrow money for the refurb or buy with bridging finance and pay for the refurb with cash? Our man in Nottingham has told us that to get a 6 bed HMO, we would probably need to spend £185,000 and we would then need another £80,000 for the refurb plus enough money for stamp duty, legal fees financial costs and other bits and pieces. So we would need to borrow around £30,000. For the Buy, Refurbish, Rent & Refinance model to work, we would need to buy with cash or on a bridge because we would be breaking the conditions of the loan if we undertook a huge refurb to convert the property to an HMO while on a buy to let product. As today’s guest Simon later pointed out to me, if you take out an HMO mortgage, the property has to be ready to let as an HMO on day one of the loan. Now because the only UK income we had was from our original London property, it made sense to buy the first student HMO personally rather than within a Limited Company structure. But if we bought it jointly, when we came to mortgage the property after the refurb, we might find that rates were less favourable given my wife’s status as a foreign national. But at the same time, we wanted to take advantage of her personal tax allowance which at that time was £11,500. So we opted to buy in my name only but with a deed of trust set up so that the beneficial ownership (ie the rental income) would be split 50:50 between my wife and myself. Our  main worry at this stage was getting an HMO mortgage six to nine months after the refurb. The broker I was talking to at the time told me that it should be ok despite the fact that I didn’t work for a multi-national company. Long-time listeners will remember that one of our failed property purchases in 2017 had collapsed after the lender had changed their expat lending criteria in between their offer in principle and our agreeing to buy. So, we were understandably nervous about the prospect of buying a property with cash and borrowing money for the refurb if we ended up being turned down for an HMO mortgage six months later. This could be a real problem given that we would need the money released through the mortgage to pay off the loan for the refurb. Now you have to understand that we were learning all of this as we went along. We’ve had some great guests on the podcast who have all offered different pearls of wisdom. Steven Pardoe on Episode 11 told us of the importance of taking the time to set up your business structure correctly, and for the long term, right from the beginning. But, for us and maybe for you now, we didn’t know how far our property story would go when we were just starting out…That’s why you need property training I can hear some people say, and most of my amazing guests have paid for education, but they’re the successful ones. We never seem to hear either from people who have paid for courses that were not very good or from people who were not suited to the world of property investing in the first place and just wasted 20 grand for education that they would never end up using. So what I’m trying to say is that back in 2018, if we had had the benefit of hindsight, we’d have set everything up from the start, using a sophisticated but efficient tax structure but to use a cliché we didn’t know what we didn’t know and we weren’t prepared to pay thousands of pounds to find out if property was for us… At this point, you might be wondering how I remember all of these details some five years after our story began. Well, the answer is, I keep a journal on Microsoft Word As I record this now, it stands at more than 235,000 words and anytime I want to check something I can do a Command F wordsearch and scan through my journal for the answer. So if I look back to January 11th 2018, in the middle of all our indecision as to the way forward, my journal says this: A part of me thinks that if we just go ahead and buy with cash, we’ll just have to make sure we get a mortgage later one way or another. We just need to have a plan B to make sure we can pay back the loan for the refurb. Despite what people may tell you, there is no right way or wrong way, there is only your way. As Vicki Wushce from Episode Five points out, you can only make the best decision according to the information at your disposal at the time. And then you earn or you learn. So we decided to buy with cash in my personal name with a deed of trust to split the profits. However, the deed of trust would need to be set up at the time of purchase. Why? I hear you ask… And to be honest, I don’t fully understand, but I’ll try and find out before next week’s episode and let you know then. Back then, the mortgage advice I was receiving was not bad, but if it was as good as that offered by today’s guest, I wouldn’t have changed brokers right? Last week, Simon gave us lots of good pointers around who needs a broker in the first place, what to look for in a broker, how to prepare for an application as an expat and how to deal with your solicitor during the conveyancing process so it’s well worth going back to Episode 15 for a listen. One of the things I like most about Simon is his ability to foresee future problems. And one such problem on the horizon at the time of recording in April 2022 is the impact of proposed changes in legislation concerning Energy Performance Certificates which state that ‘All new tenancies from 1 April 2025 and all existing tenancies by 1 April 2028 must meet band C or higher on an EPC.’ And that’s where this week’s episode begins…

Simon Alen 

At the moment, you need an EPC of E or better. So that's A, B, C, D, or E. If it's  F or G a buy to let lender will not give you any money, it is not suitable to be rented. In January of this year, a government consultation finished that minimum E needs to be increased to a C, depending on which area of the country that you're in probably between 40 to 70% of the properties that are out there fall into a category of a D or E. Now I must stress that this is a consultation, I don't know when the results will be out. If it does come out, they're talking that all new tenancies need to be a C or better in 2025. For existing tenancies, I think it's 2027 or 2028. I can't remember which one. So one thing that I'm doing with everybody, asking if you've refurbished it since the last EPC was done, and lots of people have so this is if it's a D or E. It will be then to see if their EPC assessor, if they were to do a new one, would it end up being a C because quite a few lenders are offering cheaper mortgage rates if it's a C or better. So I had one recently which was refurbished, and it was still at a date you wanted to re mortgage it, he spoke to his assessor and said, Yes, I'll be able to from what you've told me that will be a C, just need to come round to check. He paid his 65, 70 pounds, whatever it was, it came back as a C. And that has saved the client about £8000  over the next five years just by changing it

Expat Property-Guy 

Wow.

Simon Allen 

If you are looking at purchase or remortgage and it's a D or in the now then you have to think to yourself in three years time this property might not be rentable. So Can I get it to a C?

Expat Property-Guy 

And what about say, for example, you've re mortgaged the property. And then within the terms of say, for example, a five year fix during that five year fix EPC comes up for renewal, and it turns out to be a D are you then in breach of your mortgage terms?

Simon Allen 

I would say that if somebody had one now, that was an F or a G, and they had a new tenant in, and it was mortgaged, they ARE in breach of their mortgage conditions. Now normally, when any legislation comes in, you have notice. So it's not going to be it's coming out in May 2024. So the legislation we confirmed in May 2024, you've got to act on it from June 24, I'd imagine you will have plenty of notice. Right. So you need to look at your current EPC. Quite often it will tell you how many points the improvements will be and just look. There's also an exemption. And I'm not sure how lenders going to view this. At the moment if you spend £3,500 to try and improve the quality of the EPC, if it still doesn't get to the EPC requirements the lender needs, then it can be exempt that £3,500 is being talked about by the government as part of this consultation to go to £10,000. So if you spend £5000, they may turn around and say we got to spend another £5000. And then we'll mark it exempt. What I don't know, because it's not out and lenders will need to look at the detail, is how lenders will view it. What I can see now is more and more lenders are bringing out green mortgages, as they call them whereby there are lower rates in the market. And certainly there's several of the expat lenders that I deal with have brought these out because the lenders will also be targeted about the number of mortgages they do that are green and aren't so I think once it comes out in legislation, sorry, if it does, then the lenders will be at it quite quickly with their interpretation of what they have to do. The only bit of advice to remember on this I would say is if you're looking at buying anything or fixing it, just bear in mind, what would you do if you are not able to turn it into a see if the legislation comes in?

Expat Property-Guy 

While we're on the subject of EPCs, everyone should bear in mind that you are liable for anything that's wrong with the EPC not your managing agent.  Valuations that's all also a tricky subject.

Simon Allen 

It is and it's a very frustrating subject as well because a lot of the time especially if you're talking HMOs and multi-unit you're paying really good money out. I would say first of all, it's a valuation for the lender. It's not a survey when you're looking at a purchase. Most of the time the lender  will provide you with a copy of it, but not always. They just want to know how much it's worth. Will it rent out? If so, how much? Is there anything obvious that needs further investigation? Damp, structural, and is it suitable for mortgage purposes? That's what a valuation is on a single let. For a HMO, it's a little bit more complicated. Some valuations will include comparables, so you'll be able to see them.  Other valuations don't include those comparables, but the valuer would have done that in the background. Some lenders will give you a free valuation, or it might be a set price, irrespective of the value of the property up to say, a million pounds. I've got one lender who just charges 300 pounds for a valuation, irrespective of what the valuation figure is. And that's HMOs as well. If you've recently refurbished it, and you're getting a rental figure way over everybody else, will your figures work on what everybody else is getting a rental figure because once somebody goes into your property, it's not new anymore. And what the value will always look at is when somebody comes into that property, what will they rent it for? Do your homework, do your comparables, it needs to be things that have been rented out or sold. If it's just an Right Move that doesn't count as it is for sale and Right Move. It literally has to be sold. If it fails, first time with a lender, there's nothing to stop, you're going to another lender, if you use a different valuer, but it's do your homework and the surprises should be less.

Expat Property-Guy 

A listener wrote me an email wanting me to ask Simon about the difference between limited company mortgages and mortgages for properties held individually.

Simon Allen 

I'd always talk to your accountant first to get tax advice. And it may be a specialist tax advisor you need because single Epson limited companies is different tax treatment. So that's their area of expertise. The broker should just talk about finance. If somebody comes to me, and it's a limited company, and it's their first purchase, then I would tell them what the rate is on a personal bank select mortgage is as well. So we compare the two. When we talk about the expat market, most of those lenders will do limited companies as well. So it's not like you're reducing the market in any way. And there's no real differential between the limited company market for an expat than personal for expats, with the majority of lenders is the same rate speak to your accountant look at your plans of where you returned to the UK, what you'll be doing in the UK,

Expat Property-Guy 

Did you say that the rates are pretty much the same or not the rates a little bit more expensive for a limited company than for personal

Simon Allen 

The majority of the clients that I deal with are in the portfolio category. So we've got four more mortgages off the top of my head, I can't think of anybody that's got different rates in person unlimited.

Expat Property-Guy 

Okay, we talked about anti money laundering. In the first part of the interview in Episode 15. asked Simon, if he had anything to add?

Simon Allen 

Well, we've spoken about the documentation, getting a decent solicitor and having all those originals. One thing that we'll also ask for is the proof of deposits. If you've got some money, and it's in a bank account, don't just swap it into another five bank accounts just to get an extra penny of interest a month. Lenders like to see where the money has come from. And so your solicitor and a solicitor was recently talking to me and they went back five years for where some money had come from. Now that was an extreme example. So there must have been reasons for that. But most lenders will go back between three and 12 months of where their money has come from. So if you've re mortgaged, then have a copy of the completion statement, have a copy of the solicitors correspondence, keep copies of your bank statements. I've seen some poor clients have to produce 50, 60 bank statements because they've been switching money all over the place, they'll try and keep it in one place. It's much easier for you in the long run.

Expat Property-Guy 

And I guess it's always better if you're not drip feeding everything but try to minimise the amount of emails and things like that and just do everything in one go.

Simon Allen 

Yes it is... what we tend to do, especially if it's a purchase, you know, you might need a decision in principle. So if it's a new client, then we need all the information if it's an existing client who we've done something recently for we might not need as much to do that decision in principle, but no certainly for an application or certainly anything that's you know, income related, or address related, then we certainly do we need that at the start. There's a lot of information that can be provided in advance. Some information will go out of date like bank statements, payslips etc. That's just a question of downloading it now but it is ideal to get everything at once it's much easier for everybody.

Expat Property-Guy 

So what's the most irritating thing? What makes you throw your eyes in the air and throw your toys out the pram?

Simon Allen 

I don't often throw my toys out. Certainly not with clients I wouldn't... and there's nothing really irritating from a client's perspective because everybody's different. Some people don't like filling forms out. So we'll do it over the phone with them. Some people want everything to be secure. So it goes in a zip folder with a password. You know, it's what the client wants. All we can say is, well, there's these alternatives. And if they're comfortable, great, if they're not comfortable, then we'll just continue to use what they do. When I throw my dummy out, it tends to be at the lenders for asking things they shouldn't or interpreting maybe an item on a statement or something about the property. There was one recently where the valuation was given a nil value. So the client was distraught because the property was worth about £400,000. But the valuer said it was too near electricity pylons. That's the kind of thing that we look at before we place a case and I hadn't spotted any pylons. And then when we did some more digging, the pylons were about 200 metres beyond the house. But the valuer was working off old guidance from the lender, that if there was pylons in the vicinity, then they didn't want that property. However, about a year ago, they had reissued their guidance to say we are happy as long as the wires don't go over the house. And in this case, they didn't. So one, the lender should have spotted that. So the dummy was literally thrown at them for that, in a nice way. And then secondly, that dummy was then thrown at the valuer to say you're working off old criteria. So the value then came back reduced the value down slightly, because it was still near to them but, it's now got a value of £370,000, which the client is more than happy with.

Expat Property-Guy 

So that's what a good broker is for right to get you out of those holes. We've talked a little bit about HMRC. Anything else to add on that

Simon Allen 

It's declaring all your income if you've got six buy to lets with £60,000 of income in your personal name, then all the income needs to be going through your tax return. If there's a fancy tax scheme that somebody wants to talk about, speak to a chartered tax accountant about it and speak to a broker how it may affect lending. Usually the answer is you will never get lending again if you go into a tax scheme. So just be very very careful to know lots of expats are being targeted with

Expat Property-Guy 

I asked Simon about the most popular investments that he comes across?

Simon Allen 

That's a depends question. I would say. Generally across all my clients is still single lets but then I have clients who will specialise in HMOs. Holiday lets is a little bit more difficult to specialise in, serviced accommodation, some people normally add it on as a portfolio. Most people will tend to start with single lets. HMOs, most lenders want landlord experience anyway. And that can vary between no experience in three years landlord experience and once someone's got HTML quite often they'll go into a multi unit. So that is where you have maybe a Victorian house split into four flats, but leases haven't been created. So all on one title. Lenders tend to treat them in the same category as HMOs for their rates. Serviced, accommodation is becoming more popular, but I've probably eased off a little bit because there's a lot of competition in that area. And there's only so much service accommodation you can do if you're on a city break and you don't want to be 20 miles out in a suburb with no train route or bus route with nothing nearby. Most of what I see I would say is single Lets and HMOs. Semi commercial that's quite common. So you've got a retail unit on the bottom. And then you've got residential above. We also have a lot of clients who have a decent team in the UK who will do refurbishment so they'll have people looking for property, they'll then do a refurbishment, it might be something that's not marketable, which puts a lot of people off. So we'll arrange bridging finance, we'll arrange back to that that's becoming more popular

Expat Property-Guy 

After the 2008 financial crisis, the Bank of England introduced a stress test to ensure that borrowers would be able to cope with a 3% increase in the lenders rate during the first five years of a mortgage. This means that investors are able to borrow more using a five year fixed product than if they were to take out loans with a shorter term. This may be useful for landlords investing in lower yielding areas of the country.

Simon Allen 

A stress test is also known as a rental calculation. This is an extreme example I'm going to give you now if you've got a house that's worth a million pounds, then you might think yourself well a buy to let mortgage will get me 75% So I'll get £750,000 on that. However, and I said it's extreme, if the market rent in the area is only £1000 for that house, nobody will ever pay more. Then the amount of mortgage you will get will be based on the market rent. £1000  is then put into a calculation. That calculation is different if you own it personally or within a limited company. It is different if the profit that you are going for with a lender is less than five years and it's also different if it's a real mortgage, but the most common three that I would look at are: in your personal name in a limited company name, and if the product is five years or more. So to give you an example, you're buying something for £300,000, the yield is quite low, it's in the Midlands, or the southeast, southwest, and the yield is 4%. So you get an £1000 rent per month. So £300,000 you're thinking right, I can put 25% deposit in. So I can get a  £250,000 buy to let mortgage. However, the yields reasonably low, and everything is based on that rental calculation. So if you were buying it in your personal name, the maximum mortgage you would get is £150,000. If you were buying it in the limited company name, the maximum mortgage you would get is £174,000. But that is only on products less than five years, if it's five years or above the Bank of England who devised all this upset to lenders that you can choose a different rate on that £1000  example, on a £300,000 purchase on a five year fixed, you will get your 75%. Right, in fact that the calculation with one lender would take you up to £287,000. However, as 75% is the maximum they'll do, then you're not going to get 287,000 we're going to get £225,000. But that shows the difference between the five year calculation and the less than five year calculation. And that's why I've mentioned before about the EPCs. It's really important because quite often people go down the five year fixed route because they want to maximise the borrowing that they can get on the low yielding property.

Expat Property-Guy 

So quite a complicated area, then

Simon Allen 

It is

Expat Property-Guy 

And what difficulties can expect expect as their portfolios grow?

Simon Allen 

If you're used to dealing with an overseas bank, then that bank will stop dealing with them when it hits number four, however, there's still plenty of choice out there, the next threshold is probably round about 10 or 15, but not with many. And there's plenty of lenders that will still be going when you've got 50,60, 100 properties. So the biggest thing really is to transition from a non-portfolio landlord to a portfolio landlord, because there's lots of little building societies scattered around the country that will lend to you if you've got up to three mortgages and over that, they won't.

Expat Property-Guy 

So there's usually always a solution. And how about at the end of a fixed term, they could just do a product transfer, is that right?

Simon Allen 

They can if the lender offers it not all do, if we were having this conversation two, three years ago, I could probably count them on one hand, now the vast majority will do a transfer

Expat Property-Guy 

And what happens when expats go home in terms of remortgaging buy to let properties or HMOs, etc, etc. If they're no longer drawing a salary, so maybe they're working abroad and they go home, they're no longer working?

Simon Allen 

Income will be declared to HMRC. And the lenders will accept the HMRC documentation. If your portfolio is within a limited company, you need to be taking a salary out of there, so lenders can see it. Or alternatively, some lenders will just ask for a set of accounts. So you don't have to take a salary out if you don't want to. But if everything's going through a limited company, you need to be able to take that money somehow, you should know when your your mortgages are up for review. If you're in Abu Dhabi, and you're coming home in three months' time, and you've got a mortgage in four months, then speak to a good broker who will be able to prepare you but plenty of lenders will take you on as soon as you come back.

Expat Property-Guy 

And it's not a problem. If you've got some personally held on some in limited company?

Simon Allen 

No, there's no issue. I mean, personal is probably more transfers available. So a product transfer doesn't look at your current situation. The broker may ask you though, do you have sufficient money to cover your overheads, et cetera? But from the lenders perspective, they won't ask that question. The problem is the lenders didn't do a product transfer. And you don't want to go into the lenders variable rates. So that's why you need to plan I would say you need to start planning the RE mortgage or at least thinking about it probably six months before and then paperwork and deciding which lender probably be about four months before

Expat Property-Guy 

 Is there a hidden pitfall with mortgages that prevents expats getting a mortgage?

Simon Allen 

I would say it's the anti money laundering side. One of my fellow brokers has recently I had a huge issue with somebody who's a UK expat but that they're over in Russia at the moment and because of what's happening, then the lenders are sort of a little bit nervous about it all. That's an extreme example, but it's linked to the anti money laundering side and it's linked to legislation. Normally most things can be overcome. If you're a first time buyer and first time landlord it can be difficult because not many lenders will do it so quite often you might have to buy your first one with cash or the rate of interest might have to be higher but once you've got one under your belt it's more straightforward. That's why I said your international banks are quite good for between one and three because they understand your your income a little bit better. But I'd say it's the anti money laundering side and don't get upset if you don't meet a lenders criteria, because not everybody will. You're either too small, you're too big, there's something about the property, and also the values a lot ofpeople think or buy something cheap up north, although those two words don't really go together now, but a lot of lenders have minimum valuations of £75,000. And then you've got the location as well, if it's near anything that I say is noisy or smelly... So pubs, restaurants, takeaways, council waste areas, things like that, that can put lenders off as well. So as an expat, you've got less choice than if you're in the UK. So you want to make sure that the property is suitable as well. So I'd say anti money laundering and where the property is.

Expat Property-Guy 

okay. And my signature question, I always ask this or usually ask this, what does the word risk mean to you all?

Simon Allen 

That's a good one. There's risk from life perspective. And the risk from the lenders perspective. From my perspective, is making sure that my clients meet the lender's criteria. From a lender's point of view it's that as well, but also ensuring that the type of business that we're dealing with, the potential of that client also fits in with their criteria and their future strategy. To me risk is, if you're putting your hard earned money into an investment, because that's what a buy to let is, it's an investment that you could put money in stocks and shares, and there could be a stock market crash tomorrow and you lose all your money, you could put all your money into property, you could still have a fall in those values, though property is cyclical. So I would say a risk from an investor's perspective is making sure that you'll get your capital back and making sure that you'll get a good return on it for the amount of time and effort that you're putting in because a lot of time and effort isn't costable. What I mean by that is you're dealing with a managing agent, you can delegate but you can't abdicate, especially with HMOs you still need to be wary of all the legislation. What you don't want is somebody falling down the stairs, somebody putting a deep fat fryer on a roof, that kind of thing. So it's a risk. It covers the finance, it covers the property, but I would say making sure that you get the capital back and you get a return on your money.

Expat Property-Guy 

Great answer. So Expat Property Story's favourite mortgage broker. Simon Allen, thank you so much for your time.

Simon Allen 

Pleasure.

Expat Property-Guy 

That was Simon Allen and as a reminder, the code for a 20% discount on Simon’s broker fee is EPS1. All of Simon’s details can be found in the show notes or you can find him at www.searchlightfinance.co.uk This week’s three highlights are firstly to have a look at the Energy Performance Certificates for each of your properties. If any of them are a D or lower find out how much it would cost to get them up to a C. Simon gave us an example of a client who only needed to spend 65 quid to get their EPC upgraded to a C, which gave them access to a mortgage that saved them about £8,000 over five years. The second point to note was Simon’s warning to avoid those fancy tax saving schemes you might see talked about on landlord forums. If you sign up for them, you may very well find yourself black listed by all lenders. And finally, if you’re an expat considering becoming a repat, i.e. returning to live in the UK, you’ll need to start planning for that in terms of any re-mortgaging six months in advance. I chose this week’s exotic listener location purely because it sounded so exotic and strange that I had to look up where it was on Google Maps. My podcast directory lists it as C H A M, Z U G, so I’m guessing it’s pronounced Cham, Zug.  I must confess that I was quite surprised to find out it’s actually in Switzerland, just to the south of Zurich and if you look it up on Wikipedia you’ll see that Zug is actually a lake and it looks absolutely stunning. So if you’re our man in Cham or our woman in Cham, don’t be shy… leave a message ,either spoken or written at www.expatpropertystory.com with some feedback or a review or an idea for a future episode. Earlier in the show, I told you how we only ever seem to hear the success stories on property podcasts and in a way you can understand why… after all, it takes a brave person to hold up their hand and say, I made a mistake. Let’s be honest, property is a risky business and all of us have taken risks to one degree or another and if I look back at my own story, there are several places where things could have gone badly wrong. But next week’s guest wants others to make sure that no one else has to go through what he went through as he lost £300,000, that’s right, £300,000 in a joint venture deal that went truly, horribly wrong. I always find myself saying ‘This is an episode you won’t want to miss,’ when I describe each episode, but next week’s episode is one you CAN’T miss. Please remember to rate, review and subscribe and don’t forget to share the show to spread the word. You’ve been listening to Expat Property Story.