Liquid Expat Mortgages’ CEO, Stuart Marshall, examines some of the key takeaways from new Chancellor Kwasi Kwarteng’s mini-budget, and explains the implications for existing and prospective UK expat and foreign national investors. This is part one of a two-part article. To read part two, click here.
The Value of the Pound.
After the Chancellor’s mini-budget, the pound fell to its record lowest level against the US dollar. The weakened pound is contributing to further heightened interest rates, which are now predicted to peak at 6% next year. This, in turn, will feed into higher mortgage rates and mean a further cut in buying power, with mortgage rates having already contributed to a 28% cut in buying power.
The current feeling is that the Bank of England will have to take dramatic action to restore some value to the pound and this is leading people to predict rates of just below 4% by November – another significant hit to buying power in the UK. To put the damage in perspective, if mortgage rates rose to 6%, in line with the predicted base interest rate, it would add £465 a month to a £200,000 mortgage. Clearly, this is a cost that most prospective buyers will not be able to bear. Further, for those on their lenders’ standard rate, this may contribute to forced sales or downsizing in the face of the heightened cost.
Stuart Marshall says… ‘For existing UK expat and foreign national mortgage holders, re-mortgaging is a good idea if the mortgage is currently on the lender’s standard variable rate. If a fixed-rate deal is coming to an end, the same is true, though it’s important to check what fees would be payable for exiting the deal early. For prospective UK expat and foreign national investors, the low value of the pound is a double-edged sword. On the one hand, it is contributing to rising interest rates and, consequently, rising mortgage rates. However, on the other hand, the weak pound is beneficial to UK expat and foreign national investors, as they are often paid in US dollars or a currency that is pegged to the dollar. This means that UK expat and foreign national investors will be getting far more for their money when compared to domestic UK buyers, and this goes some way toward offsetting the rise in mortgage rates as it equates to bigger deposits, more competitive rates, and lower repayments.’
The Mortgage Market.
The mini-budget also caused lenders to remove a record number of mortgage deals from the marketplace, with more than 900 products – a third of the total mortgage market – being removed within 24 hours. Because of this, there are now less than half the number of deals available in December 2021 in the domestic marketplace. The average cost of a two-year fixed rate mortgage has increased from 4.24% at the start of September to 4.81% at the end of September, with the average five-year fixed deal rising from 4.33% to 4.76%. To combat rising mortgage rates, buyers are faced with two options: put down a larger deposit or look at smaller homes or cheaper areas.
Stuart Marshall says… ‘There is a third option that many are taking – wait! For people who are uncertain about the future developments in the property market or unwilling to compromise on the size or area of their chosen property, holding tight until the market is more stable seems like a preferable option. People have become used to the record low interest rates that have been in the housing market for years, so adjusting to the new world order is going to be difficult. Consequently, many are just not willing to buy a property at the moment.
Meanwhile, the UK expat and foreign national mortgage market is a quite different place. Lenders are creating specialist products to satisfy demand from the UK expat and foreign national investor market and, because of the lucrative nature of this market, products are not being pulled with quite the frequency of the domestic mortgage market. In fact, because of the unique requirements from specific subsections of the UK expat and foreign national market, lenders are even crafting new products to satisfy demand. For example, there is currently a huge push from Hong Kong nationals to buy UK property because of the BNO visa scheme. As a result, lenders have introduced new products specifically for Hong Kong citizens looking to utilise the BNO visa scheme. This is just one example of how the UK expat and foreign national mortgage market is its own microcosm that operates differently from the mortgage market more generally. Utilising a UK expat or foreign national mortgage broker will help potential borrowers to keep abreast of the situation and find the best deals or gain access to exclusive offers.’
Affordability Hurt by Pandemic Price Boost.
The huge increases to house prices caused by the pandemic are further compounding affordability issues as higher interest rates are now being charged on massively inflated property prices. In the last 12 months alone, the average UK house price has risen by 8.2% – £19,650. However, affordability has not been affected as badly for flats compared to houses. The effect of the pandemic means that the average price of a house has risen five times more than the average price of a flat since 2020.
Stuart Marshall says… ‘The pandemic price increases are just another contributor to difficult affordability conditions for domestic buyers. With many buyers already looking towards smaller properties or more affordable areas, the new higher rates have been enough to put some off buying altogether. In the long-term, this is likely to lead to price decreases or slower price growth. This means that UK expats and foreign nationals looking to invest in the UK market will again be looking at a slower market and a greater potential for price reductions.’
‘The other good news for UK expat and foreign national investors is with the types of properties that gained the most value during the pandemic. As discussed, houses have grown in value significantly compared to flats. But the popularity of flats has been soaring in the rental market, meaning high rents for landlords with the right property. For UK expat and foreign national investors, the lower price of flats is good news then. Flats are proving to be more popular as a rental because of their low energy costs and comparatively superior energy efficiency. For many consumers in the rental market, securing an energy efficient property with a small footprint – like many newbuild flats – will be incredibly valuable in planning their monthly finances against an uncertain financial backdrop. Because these properties are more affordable, UK expat and foreign national investors can negotiate better rates and charge higher rents. They are also able to put down bigger deposits because of the competitive exchange rate against the pound.’
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