Investing in property overseas is an excellent diversification tool, but the funding process can be tricky. Here are some things to consider if you are looking to buy your first piece of real estate in the UK.
South African taxpayers are allowed to externalise funds of up to R11 million per calendar year – which includes a R1 million single discretionary allowance (no tax clearance required from SARS) plus a R10 million foreign investment allowance (SARS tax clearance certificate is required). As a couple, you can manage a decent amount for a deposit, but will most likely still need to take out a bond.
Some South African banks (including Standard Bank, Absa and Nedbank) offer loans for offshore properties. There is, however, also the option or applying for a mortgage in the country in which you are investing.
What are the benefits of an international mortgage?
The obvious benefit of an international mortgage is being able to borrow money from banks at low interest rates and the ability to increase your return on that equity.
“If you’re buying a property for £200 000, for example, and the bank’s giving you 50 or 60% of that money, then the absolute growth you get from that property is more, relative to the amount of money,” explains George Radford, Managing Director: UK and Africa RPA Group.
Secondly, although you’re liable for the mortgage, you’re not taking on as much risk as you’re physically not putting in as much money.
Thirdly, there are certain tax benefits as you can offset some of your mortgage costs against your gross rental income.
Buying property in the UK
Once you have made the decision to invest in property, it’s important to familiarise yourself with the laws of the country in which you plan to purchase and understand the necessary qualification process for a mortgage market.
Unlike a local mortgage loan, you won’t get a 100% international loan in the UK because the bank won’t take the risk. Depending on where the property is based, its value, the expected rental income, the lender and your financial standing, you could get a 60 to 75% loan to value mortgage, and you generally need at least a 20% deposit. You could also secure a loan against existing assets.
Be aware of stamp duty, which is the biggest additional expense of buying a home in the UK. Foreigners purchasing property in England and Northern Ireland are subject to 4% stamp duty with an additional 2% applying for foreigners, totally at 6% stamp duty of the purchase price.
What are the risks involved?
If you default on your mortgage payments consistently, your property is at risk of repossession. So, while financing is great, you need to go into it with open eyes and understand that you are borrowing money. Ideally, your loan will be paid by a tenant who is paying the rent for that property – so it’s crucial to invest in the right area where there is tenant demand.
How do I qualify for a UK mortgage?
Despite popular opinion, South Africans who don’t have residency in the UK or a British passport can buy property there and get a mortgage. South Africans holding a British passport have access to a wider choice of mortgage options. Other requirements are that you have to be employed, earn an income and be of a certain age. UK banks don’t like to lend beyond the age of 75.
What is the best mortgage option?
There are different types of mortgage products in the UK, including fixed and variable rate mortgages, as well as repayment mortgages. Many buy-to-let mortgages in the UK are interest-only so you only pay off the interest and then pay off any outstanding balance at the end of the mortgage. Repayment buy-to-let mortgages are also available but more expensive so it is important to talk to a mortgage broker in order to choose the right product so that it doesn’t impact your rental returns, advises Scott Irving, GM of Carrick Property.
“I find now everyone’s chasing yield,” explains Radford. “Based on that a lot of clients go for an interest-only mortgage because they want that yield on a monthly or annual basis. But some people don’t like the idea of having to repay the debt 10 years down the line. If you’re slightly older and don’t want overhanging debt in 10 or 15 years’ time, it would be more prudent to take on a repayment mortgage and make sure that when you go into your retirement, you’re not paying it off. If you’re younger and are still building wealth, an interest-only mortgage might make more sense.”
Bank or mortgage broker?
Radford encourages clients to explore both options. “If you’re financially sound and have a strong relationship with your bank, deal directly with them. If your situation is not that straightforward, I would recommend using a broker. They will typically run scenarios for clients to understand their investment needs and their financial circumstances and then present options. They will guide you through the process, manage your application and present it in the best way to maximise your chances of being approved for lending. It’s worth exploring both sides so that you can compare and contrast.”
Due to the complexities of purchasing property abroad, it’s important to have a specialist on board. Carrick Property works with key partners on the ground in investment-friendly areas and is able to assist clients in finding the right property in the right area based on budget and objectives, as well as securing mortgages.
