UK expats hit by mortgage drought

Lenders pull out of buy-to-let market for owners abroad

British expats in EU countries are scrambling to find affordable options for remortgaging their UK homes amid high interest rates, as big lenders have retreated from the market segment in the wake of Brexit.

Many UK homeowners sent on overseas corporate postings often rent out their homes while abroad. Lenders will insist their standard residential loans are converted to “consumer buy-to-let mortgages”, which typically come with higher interest rates. These have risen sharply in recent months, as expectations have grown that the Bank of England will have to keep its official rate higher for longer to combat inflation.

However, competition in the sector has dwindled after many big banks stopped offering expat mortgages from early 2020, when the UK’s departure from the EU imposed new regulatory hurdles for British banks offering financial services across the bloc.

As expat borrowers reach the end of a fixed-rate deal and look to refinance, they face interest rates as high as 8 or 9 per cent, according to lenders and mortgage brokers. Some banks are turning away expat remortgage applicants or requests for a bigger mortgage. Others, but not all, still offer product transfers, where a borrower is given a new rate offer with the same lender — but at much higher rates than previously, they said.

Lorraine McLean, head of buy-to-let mortgages at Guernsey-based bank Skipton International, which remains active in the buy-to-let mortgage market for non-UK residents, said the bank had seen an influx of demand from borrowers whose existing lender had offered them “a ludicrous rate” on renewal or none at all.

The bank said it had seen a 40 per cent rise in completions in the first three months of 2023, compared with the same period last year. Completions in the year to date had surpassed the total for 2022, it said.

She gave the example of one recent expat applicant with a £475,000 family home in the north-west of England, who said he had been with a lender for five years as an expat on a buy-to-let rate of 4.5 per cent. When the time came for refinancing, the best rate he was offered was 8.5 per cent. “And that was a variable rate. With base rates rising again a couple of times since we spoke, he could be looking at nearer 10 per cent now,” she said.

When the UK left the single market for financial services, UK-based lenders lost the so-called “passporting” rights that allowed them to do business in any EU country with minimal extra authorisation.

One director at a major lender, who asked not to be named, said: “Before Brexit, UK lenders to individuals based in the EU — whether UK or EU citizens — were only required to ensure they followed UK lending rules. Now they have to show they’ve also followed the regulations in the borrower’s country of residence, even if they are UK citizens. There’s no capacity or appetite to do this.”

The lender continued to offer product transfers on expat buy-to-let mortgages, he said, but had stopped lending to new expat customers or allowing existing customers to expand their mortgage borrowing.

Research by Hamptons, an estate agent and sister company of Skipton International within the Skipton Building Society group, suggested international demand for UK buy-to-lets is declining. It found the proportion of internationally based individuals among buy-to-let landlords was down to 4.1 per cent in the year to date, compared with 6.5 per cent last year and 8 per cent in 2012.

Stripping out the non-UK citizens from these figures, such as Australian or Hong Kong landlords with UK property, British expats accounted for 1.1 per cent of landlords so far this year, compared with 4.2 per cent in 2012.

Most expats who wish to continue owning and letting their UK home while abroad, having first lived in it on a residential mortgage, are offered a consumer buy-to-let mortgage after a grace period of about 12 months from the point of their departure. Unlike loans that were originally taken out as buy-to-let, this type of mortgage is regulated by the Financial Conduct Authority.

Those who own a mortgaged buy-to-let via a limited company are unaffected by the regulatory changes — though these commercial borrowers too will face higher mortgage interest rates when refinancing.

For the average expat, an added hurdle to remortgaging with a new lender is the requirement that they pass a mortgage stress test assessing their ability to repay under interest rates higher than the deal they are being offered, to reduce the risk of future defaults. However, stress tests are not required when they opt for a product transfer with their existing lender.

Ray Boulger, technical manager at mortgage broker John Charcoal, said the reason some lenders were no longer offering product transfers was either because of the high costs of upgrading their systems or the belief they would be contravening regulations.

“For a lot of people, a product transfer would actually work better,” he said. “If you took out a mortgage three or four years ago when rates were lower, you might have passed the stress test quite easily. You may now find you can’t pass the test, so your maximum borrowing is reduced.”

This article has been amended since publication to reflect the fact that Hamptonsand Skipton International are part of the Skipton Building Society group.

This article was written by James Pickford of The Financial Times, and we are publishing it with their permission.