UK Expat Mortgage Guide

Important Risk Warnings

What are the Main Mortgage Types?

Generally, there are two types of repayment mortgages people choose from:

1. Fixed-Rate Mortgages
2. Variable Rate Mortgages

However, some customers also want to take out interest only mortgages which differ from repayment style mortgages and can be harder to obtain and more complex to arrange.

Liquid Expat Mortgages will discuss Fixed-Rate Mortgages, Variable Rate Mortgages and Tracker Mortgages in addition to Repayment versus Interest-Only mortgages.

What do you need to consider when taking out a mortgage?

There are many factors to consider when assessing your mortgage needs. However, three main considerations need to be.

1. How can you be sure you are making the right choice?
2. How do you go about evaluating the right choice?
3. How do you plan and decide which choice to make on the fact that no-one can predict future interest rates?

First and foremost, it is always advisable to speak to a specialist and qualified mortgage broker who has a proven track record of dealing with mortgage needs.

Liquid Expat Mortgages believes customers should understand the differences of available mortgage types. Committing to such a large financial decision needs you to share information with us in relation to your mortgage needs so that the best mortgage product can be presented.

It’s always a good idea to seek out information from an expert specialist broker before committing to a large financial decision. The information you share can determine how good your mortgage rate is.

This simple guide allows you to briefly see the differences between the mortgage types and will allow you to understand which type of mortgage best suits your needs. As a specialist broker we are always on hand to discuss your needs or simply answer any questions you may have on a particular mortgage type. It also serves to highlight various Risk factors you need to appreciate about future interest rates and market forces that no-one can simply predict.

What is a fixed-rate mortgage?

Here are some features to consider when considering taking out a Fixed Rate Mortgage or a Variable Rate Mortgage.

Fixed-rate mortgages provide you with the security of knowing exactly how much you pay back each month. A fixed rate mortgage allows you to fix the selected rate of interest you pay back on your mortgage for a set period. This is often a fixed period of between two and five years. There are some lenders who offer fixed interest rate terms between seven and ten years.

As a rule of thumb, the longer your fixed-rate mortgage term, the higher the mortgage interest rate tends to be. This is because it’s harder for mortgage providers to predict the markets over the long-term, so the higher interest covers any risk on their part. However, you have the comfort that in a rising interest rate market you’re protected from these variations and your repayment is fixed for your agreed period. In summary, you may pay more initially, but you have the certainty that your repayments will be level for a set period; the risk you take is that interest rates fall, and you do not benefit.

The availability of fixed rate mortgages can be reduced in times of rising interest rates. Whilst a fixed rate mortgage can give you certainty around monthly payments, the Bank of England Bank Rate may go down as well as up. The value of your home may alter with market conditions so that the amount of the loan may exceed the value of the home.

What is a variable-rate mortgage?

A Variable-rate mortgage is one where your interest rate can be changed at any point entirely at the discretion of the lender.

If you decide on a variable-rate mortgage, you’ll need to understand that there could well be changes to your monthly repayments. This means higher monthly repayments if the interest rate rises. Of course, if interest rates fall, you’ll probably benefit from lower repayments. Variable rate mortgages may be discounted for an introductory period which can make them look very competitive, at least initially.

A variable-rate mortgage can be used for the duration of your mortgage repayment term.

Is a tracker mortgage the same as a variable-rate mortgage?

Whilst this type of mortgage works in a very similar way to a variable-rate mortgage, it has subtle differences you need to be aware of. One difference is that Tracker mortgages are linked to a specific index such as the Bank of England’s base rate.

Therefore, tracker mortgages can save money when the linked index falls, but if it rises your mortgage could become more expensive.

So, whenever you consider a tracker mortgage, also consider that you may want to choose a lender without penalty fees so you can leave your agreement early and move to a better rate mortgage.

Why do variable-rate mortgages fluctuate?

Variable-rate mortgages are subject to fluctuating interest rates and are widely impacted by what goes on in the wider economic and financial markets as any volatility in these areas can affect the interest rates on a variable- rate mortgage.

What determines changes in variable-rate mortgages?

Interest rates can be adjusted using a specific reference rate or benchmark.

SONIA (Sterling Overnight Index Average) and the Bank of England base rate are two benchmarks used to determine changes in variable rate mortgages.

Is there a difference between SONIA and The Bank of England base rate?

SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors. It therefore reflects banks’ confidence in each other as well as the confidence they have in each other’s financial health.

The Bank of England (BOE) base rate is set by the BOE Monetary Policy Committee (MPC) to decide the base rate. The Bank of England base rate is the UK’s most influential interest rate as its official borrowing rate sets the level of interest all other banks charge borrowers. 

The MPC meets to discuss the base rate every 6 weeks and is generally used by the government to manage borrowing costs in line with inflation. Most tracker mortgages are directly linked to this rate.

What is an adjustable-rate mortgage?

A frequently available variable mortgage product is an adjustable-rate mortgage. This type of product offers the borrower both a fixed and a variable rate that resets periodically.

These types of mortgage loans are often structured to charge a fixed interest rate for the initial years of the loan or mortgage. After the fixed period ends it is followed by a variable interest rate for the remaining mortgage term.

The specific length of term for the fixed and variable-rate mortgage will vary according to the lender or mortgage provider and the product being offered. Deciding on the most suitable length of term for a fixed or variable-rate mortgage can be complex and will need to consider your financial circumstances and your requirements.

That’s why we recommend you speak to a specialist mortgage broker before making any decision about which mortgage to take out.

What’s the difference between fixed and variable-rate mortgages?

These are some of the main differentiating features between fixed and variable-rate mortgage which are designed to help you compare the two types of products you might be considering. It is recommended that you should consult a qualified mortgage adviser to help you decide which type of mortgage is best for your specific needs.

• Fixed-rate mortgages offer a fixed level of interest for a set period during which you pay a set monthly repayment; then it reverts to variable.
• Fixed-rate mortgage product rates are usually higher than variable rates.
• Variable-rate mortgages offer interest rates that can change depending on market conditions and economic factors. You therefore need to be aware that you may have to make higher monthly repayments if interest rates rise. This type of mortgage product means you must be able to afford changes to your monthly repayments.
• Variable-rate mortgages can be taken out for the duration of your mortgage term.
• Fixed-rate mortgages can be taken out for a fixed period. These periods can be discussed with a specialist mortgage broker and are dependent on your personal financial circumstances and your requirements.
• An adjustable-rate mortgage is a common type of mortgage which combines a fixed mortgage term followed by a variable mortgage term.
• Mortgages usually have a penalty period, but after that you can change your mortgage. Typically, people seek advice shortly before the end of a fixed rate or discounted period.

If there’s anything you wish to discuss please contact us with any questions you have, no matter how trivial or insignificant they appear.

Which mortgage type costs more?

Mortgage interest rates are always an important deciding factor when it comes to choosing a mortgage product to suit you. Fixed-rate mortgages provide security in knowing exactly how much you will have to pay every month, but they can often be more expensive than the variable rate mortgage.

As market conditions are always in flux and fixed rate mortgage lenders compete to bring their best mortgage products to market, you are advised to investigate the type of product you are considering. Only when you compare it with similar available mortgage offers are you able to really compare the true cost of a mortgage over its set term.

A specialist mortgage broker such as Liquid Expat Mortgages can help assess your financial situation as well as your objectives over the term of any mortgage. If you already know what type of mortgage you prefer, there’s no harm in talking to us as we’re a specialist mortgage broker with the experience to discuss your options and help you with any questions you may have. In this way you can consider and understand all aspects of your preferred mortgage choice.

Should I get a fixed or variable mortgage?

Would a fixed-rate or variable-rate mortgage product be the best for your specific circumstances? As with all major financial decisions, there is no one size fits all answer.

Your personal circumstances and situation will determine what works better for you. That’s why we invite you to contact us with any questions you have, no matter how trivial or insignificant they appear.

By sharing your thoughts and information with us, you’ll be able to identify the right type of product to meet your needs.

When does a fixed rate mortgage make more sense?

A good example of when to take up a fixed rate mortgage is if you can’t budget for changes or increases to your mortgage rate.

If you expect Bank of England interest rates to rise, a fixed rate mortgage might be the right mortgage product for you. However, bear in mind that if the rates drop, a fixed-rate mortgage might not offer you the best rates available in the marketplace. It all depends on what your financial objectives are and what your current situation is as well as what is comfortable for your circumstances.

To understand if a fixed rate mortgage is the best product for you contact us now.

When does a variable rate mortgage make more sense?

For example, if interest rates are declining and you can afford potential changes or increases to your repayments, a variable-rate mortgage may be a good option for you.

Even if you have a good grasp of financial matters in general, and knowledge of mortgage products themselves, it’s always advisable to speak to specialist mortgage brokers such as Liquid Expat Mortgages for professional advice from a mortgage adviser as product types and rates are constantly evolving.

Contact us now with any question you may have in relation to a fixed, variable mortgage or interest only mortgage.

Is the best mortgage option a fixed or variable mortgage?

The question we’re often asked by customers is this. “Is it better to get a fixed or a variable mortgage?”

There are many factors to take into consideration before a broker or lender can identify or decide on the right product for your needs.

Key factors to be taken into consideration are your individual circumstances, which are comprised of your personal details, your finances, your financial objectives, and your own preferred mortgage type. Once all these have been assessed, consideration needs to be given to the prevailing market conditions such as whether interest rates are likely to rise or fall as well as the general economic climate.

As an individual (or couple) consideration needs to be given about the level of risk you are willing to undertake. Your profession or employment status can impact on the type of mortgage you are able to obtain. An example of this is if you are self-employed and have an irregular income. It could be that a fixed rate mortgage is more suitable for your specific situation.

As a specialist mortgage broker Liquid Expat Mortgages can discuss your needs in detail so the right product type to meet your needs can be correctly identified.

Here are a few factors which could help gauge whether a fixed term or variable-rate mortgage is best for you:

• How much is your income likely to vary over the years?
• How much can you afford to pay back in monthly repayments right now?
• If interest rates were to rise, could you still comfortably afford an adjustable-rate mortgage?
• Are interest rates currently heading up or down?
• What are the current interest rate trends, and do you expect them to continue?

These are just a few of the questions you should ask yourself when considering whether to obtain a fixed or variable-rate mortgage. Other factors are also worth considering. For example, are you the sole breadwinner in the household? Do you have savings or other financial assets?

Speaking to a qualified and experienced specialist mortgage broker will allow you to understand what options are available to you.

Interest-Only Mortgage, what type of mortgage product is it?

An interest-only mortgage is a type of mortgage agreement where the borrower is only obligated to pay off the interest amount each month. Capital repayments are usually optional, but the debt itself would normally only be repaid after the end of the term via a pre-agreed repayment vehicle such as a savings plan, pension, or selling or remortgaging the property to repay the original loan amount.

How does an Interest-Only Mortgage work?

If you take out an interest only mortgage, you borrow money but only repay the interest owed to your lender each month. By taking out an interest only mortgage you do not pay off any of the capital that you owe until the end of the mortgage term.

Interest only mortgages can be attractive to customers as the monthly payments are considerably lower than repayment mortgages. Despite appearing to be more affordable for property buyers, the key thing to consider is that you are not paying back the capital amount you have borrowed, and you will need to repay this at the end of the mortgage term.

What’s more, you’ll need to provide a lender with substantial proof that you can afford these repayments at the end of the period.

How do Interest-Only Mortgages differ compared to Repayment mortgages?

Interest only mortgages differ from repayment mortgages as you’re only paying the mortgage interest to your lender. This means that your monthly payments can be much lower than a repayment mortgage.

With a repayment mortgage you make one payment a month to your lender, part of which goes towards repayment of the actual loan, and the rest covers the interest. Whilst this means your monthly payments are higher than that of an interest-only mortgage it means you can clear the mortgage loan amount at the end of the agreed term.

An interest only mortgage requires an arrangement for paying back the full capital. This is referred to as setting up a “repayment vehicle”, which can either mean paying a separate monthly sum into another investment or using another asset/investment that already has a value that would cover the loan. A lender will need solid proof of a legitimate repayment vehicle that will be in place to pay off the capital of your mortgage when the loan term ends.

Acceptable repayment plans vary by lender, and can include financial instruments such as:

• Savings in ISAs
• Stock market investments
• The sale of a property
• Remortgaging

Your lender is also likely to make required checks that your chosen repayment plan is on track to pay the required amount. Interest only lending was very popular a decade or so ago, when many buyers were able to borrow on an interest-only basis without showing lenders proof of how their debts would be repaid.

As borrowers found it harder to repay the amounts borrowed at the end of their term, regulations for interest only mortgages were tightened considerably.

It is not normally advisable to take an interest only mortgage on your home and if you are doing so for a let property, you should think carefully about how you will deal with the repayment at the end of the mortgage term as you may not be able to refinance, and it may not be the best time to sell the property.

Talk to Liquid Expat Mortgage and a member of its qualified team to see what type of mortgage product suits you best, and ensure you understand the need to have a facility to pay back a mortgage at the end of a loan term.

What deposit do you need for an Interest Only Mortgage?

It is a lot more challenging to borrow on an interest-only basis as fewer lenders are willing to offer interest only mortgage loans. This limits your choice of product and at the same time limits your access to the most competitive rates.

Lenders offering Interest Only Mortgages generally have stricter criteria, typically in the form of a high deposit. Most lenders require at least 25% deposit, with maximum lending around 75% loan to value (LTV). There are some lenders who will consider lending up to 80% LTV or even 85% LTV.

As mortgage products are constantly changing it is always advisable to speak with qualified and experienced mortgage brokers at Liquid Expat Mortgages who can assess your needs based on your personal circumstances and work with lenders to identify the right mortgage product for your needs.

Buy to Let Mortgages

You may rely on the rental income to meet your mortgage repayments, however, please be aware that rental properties can suffer void periods and when this happens you are still responsible for paying the mortgage.

Consider carefully the affordability of this especially if you are taking a mortgage into retirement when your income may be lower.

Energy Performance Certificates

In 2015 the government introduced the Minimum Energy Efficiency Standard (MEES) that requires landlords to reach an Energy Performance Certificate (EPC) rating of C or above. Under the proposed changes, by 2025 all newly rented properties will need to have reached this target. This will be extended to all rental properties by 2028.

There is the ability to check the EPC level of most properties by visiting the Government website: https://www.gov.uk/find-energy-certificate.

For each entry on the site it also gives ideas on how the property’s energy performance can be improved/how it can improve its EPC level, with typical costings for each recommendation – such as solar water heating or panels or energy-efficient lightbulbs – and what a typical yearly saving might be.

For those properties which have levels to improve, this could be invaluable information for the owner, potentially changing their remortgage needs in order to secure extra funding to have that work carried out.

Sharia Compliant Mortgage Alternative

Providers of Sharia Mortgage Alternative Finance do business according to a set of principles, derived from Islamic teachings, which encourage fair play and ensure that financial affairs are handled responsibly.

Their property finance products are suitable for Muslims and non-Muslims alike. This page explains a bit about the principles and what they mean in practice for property finance.

The Principles

Shariah principles promote trading and enterprise to generate real wealth for the benefit of the community as a whole. It does this in a way that provides stability, is transparent and facilitates sharing of both risk and reward in an equitable way. There are some key differences between Shariah and conventional finance and investments:

• Finance and investments must not be used to support industries or activities that are against Shariah principles. These include alcohol, tobacco, gambling, adult entertainment and arms.
• Money must be put to a good use to generate profit supported by a genuine trade or business related activity. The giving or receiving of interest (making ‘money from money’) is prohibited.

How it works in practice

Rather than paying interest on a bank loan used to purchase or refinance a property, the customer buys the property jointly with the Finance Provider. Each party has a stake, according to the amount each has contributed. The customer leases the part of the property owned by the Finance Provider and pays a monthly rental payment. The Finance Provider is the registered owner of the property. At the end of the finance term, if all payments have been made, full ownership of the property transfers to the customer.

In Shariah finance, the process of buying an increasing share in the property is called Diminishing Musharakah. Musharakah means ‘joint venture’, an Arabic term that can be used to describe this type of property finance arrangement. Similar to the conventional mortgages, there are two types of Diminishing Musharakah arrangement – acquisition and rent only.

Rent Only Diminishing Musharakah

Both the customer and the Finance Provider contribute a percentage towards the purchase or refinance of a residential property.

The Finance Provider then leases its share in the property to the customer for the duration of the finance term.

Over the finance term, the customer makes monthly payments to the Finance Provider which comprise of rent only. The customer is only obliged to purchase the share at the end of the finance term, so the customer’s share in the property remains the same throughout the term.

However, if the customer wishes to acquire a part of the Finance Provider’s share in the property during the term (subject to a specified minimum), the customer can do so on each rent review date. In addition, the customer can purchase the Finance Providers entire share and settle the facility at any time.

Until the Finance Providers share has been acquired by the customer, the Finance Provider charges the customer rent for the use of its share of the property. The rent is calculated according to the respective shares owned.

Following the customer’s acquisition of the Finance Provider’s entire share, either at the end of the agreed term or upon early purchase of the Finance Provider’s share of the property, they transfer registered ownership of the property to the customer.

It’s the customer’s responsibility to put in place, maintain and regularly monitor any financial arrangements that are expected to provide a lump sum big enough to acquire the Finance Provider’s share at the end of the agreed finance term.

Acquisition Diminishing Musharakah

Both the customer and the Finance Provider contribute a percentage towards the purchase or refinance of a residential property.

The Finance Provider then leases its share in the property to the customer for the duration of the finance term.

Over the finance term, the customer makes monthly acquisition instalments – this is how the Finance Provider will sell its share of the property to the customer. With each acquisition instalment, the Finance Provider’s share in the property diminishes while the customer’s share increases.

While the acquisition instalments are being made, the Finance Provider charges the customer rent for the use of the bank’s share of the property, calculated according to the respective shares owned.

After the customer acquires the Finance Providers entire share, either at the end of the agreed term or in an early purchase, the Finance Provider transfers registered ownership of the property to the customer.

Commodity Murabaha is a Sharia-compliant financing structure often used in Islamic finance.

The provider adheres to the principles of Islamic banking and uses Commodity Murabaha to facilitate property finance.

This style of Sharia finance differs from a diminishing Musharakah Shariah product, which is seen as a Home Purchase Plan (HPP) and the bank is on the title deeds and the client has their interest registered with Land registry, so it is not on the title deed. With Commodity Murabaha, the client is on title deed and the bank has a registered charge which is more akin to conventional mortgage finance.

Commodity Murabaha involves the provider facilitating a sale of metal commodities to you for the amount equal to the finance amount (loan amount) and bank profit rate (e.g. similar to the Fixed interest rate and total interest costs over the period with a conventional mortgage). This amount will be repaid on a deferred basis (similar to a mortgage term) over a profit only basis (similar to Interest Only basis with a conventional mortgage) for Buy to Let Transactions, and profit and amortising (similar to a Full Capital & Repayment basis for conventional mortgages) for Regulated Residential Family Occupation transactions.

This finance amount will be repaid on a deferred basis over the chosen repayment period. You will take ownership of the metal commodity and consequently sell to a third-party. The finance provider will take care of this on your behalf.

Similar to a Conventional Mortgage Product, you will therefore be on the title deeds to the property and the bank will take a charge over the property until the bank has been repaid in full.

Although we are referencing conventional mortgages for ease of understanding with comparisons, Sharia finance including Commodity Murabaha are legally different to a conventional mortgage structure.

Is there Capital Gains Tax liability with Buy-to-Let Sharia refinancing?

In respect of refinancing under a purchase plan, a share in the property to be financed is sold by the customer to the Bank (this share is then leased by the Bank to the customer).

We understand that, on a strict reading of the legislation, there is a potential capital gains tax charge (CGT) triggered by this sale. If there has been a gain in value for the customer since the property was purchased and no exemption applies, such as private residence relief, it is deemed a disposal for CGT purposes.

Our understanding is that HMRC are not known to apply a charge in these circumstances, given the overall intention of tax legislation that “purchase plans” should be treated in the same way as conventional financing for tax purposes.

However, the customer should, if they deem it necessary, seek their own tax advice or make representations to HMRC in this regard.

We are happy to provide any information required to assist with this.

Disclaimer

Your home may be repossessed if you do not keep up repayments on your mortgage.

The guide is for information purposes only and is not to be considered financial advice directly in relation to a specific mortgage request. With volatile interest rates & quickly changing market conditions, opting for safety with fixing for longer period risks overpaying if the market rate comes down in this period with comparative fixed rate products.

This guide is intended to provide information on Fixed Rate, Variable Rate, and Interest Only Mortgage products and to help you understand the right type of mortgage loan that is suitable for your needs. It also tries to highlight various Risks you need to fully consider prior to making your ultimate decision.

The terminology and wording used in this guide refers to conventional mortgage products. We do however consider alternative finance options for you which are Sharia compliant mortgage alternatives, and which use different terminology and wording associated with conventional mortgages given that these alternative finance products do not technically loan money nor do they charge interest. It is your responsibility to ask your mortgage broker if you are unclear about the wording or terminology in any type of mortgage including Sharia Compliant Mortgage Alternatives.

If you decide to use alternative finance, the terminology and wording used will be explained to you in the documentation used and provided by the specific finance provider.  You will need to exclusively rely upon the advice given to you by your legal advisor that you instruct, to understand the nature of these financial products and how they are structured differently to a conventional mortgage. However, to simplify the comparisons, with Sharia Finance Mortgage Alternatives, Interest Only is typically referred to a ‘Rent Only’ and Capital & Repayment is typically referred to as ‘Acquisition & Rent’.

It is your responsibility to ask your broker if there is anything you are unsure about, or are unclear on, when considering the type of mortgage, you are thinking of taking out.