As UK property once again becomes a popular investment class, after the doldrums of Covid 19, many South African investors are looking at how to finance their purchase in the best possible way.
Anthony Doyle, director of UK based Propwealth, takes a look at some traditional, and more creative ways, to raise a mortgage as an offshore buyer.
“UK buy to let investors are fast looking at off-plan property as an area that offers many discount deals and ‘buy now pay later’ options, “ says Doyle. “During 2020 we have found that many developers have moth-balled their schemes and are now unrolling them, offering excellent incentives for buyers going into 2021.”
Benefits of New builds Investments
- There is capital growth potential while the build is underway as some schemes will take over 2 years to complete.
- Finished developments offer lifestyle options, including gyms, concierge, landscaped gardens, shops and restaurants. These extra elements all offer an attraction to the tenant and can make the property much easier to rent.
- Many developments have their own in-house rental agents making long distance administration and management a lot simpler
- New build properties come with NHBC construction warranties and insurances for new, and newly-converted homes in the UK, which offer additional peace of mind to the investor.
- In a buoyant market most developers allow one assignment of contract before completion of the building, meaning that you can sell on your property prior to you acquiring it, and enjoy potential capital growth realised on the small deposit paid to secure the property.
- Generally 70%-75% loan to value is now available to offshore investors with over 80 mortgage products currently to choose from. Mortgage choices are expected to rise as the market corrects to a new normal.
- Currently, you can expect to be offered between rates of 3%-6% – capital and interest repayments – depending on size of your deposit paid and your financial status. It is expected that Bank of England will hold interest rates low for some years which will benefit investors with mortgages. Also some developers will incentivise buyers by offering 5% interest on their deposits paid.
How to apply
Being fully employed is seen as a better option, although being self-employed with 2-3 years of financial statements generally is not an issue. Potential rental income is taken into consideration as a backup to your regular repayments.
It is best to use a mortgage broker when applying. Propwealth uses licenced brokers who will be able to undertake an affordability check first so you know how much you can buy for. Furthermore financing only needs to be in place within 6 months of the actual physical completion of the property investment, allowing for cashflow planning.
Furthermore, Doyle highlights the benefit of creating a limited company to hold your properties in as well.
”There are many tax benefits of setting up such a structure,” he says.” Its inexpensive to create and costs of accounting are minimised they more properties you add. It’s definitely a good idea to have if you intend to buy and create a portfolio over time, especially if you are leveraged,” he concludes.
Some investors refinance their current South African properties in order to buy offshore. They use the leverage of the exchange rate to reduce the investment risk.
If you have a number of UK mortgages and after a period of time you it might be possible to shop around for better mortgage rates and swap financing to lower interest. This will increase your net yields, plus you might refinance these mortgages at that time to buy more properties.
As property is seen as a very transparent and secure asset class in the UK, some more creative developers have released alternative financing mechanisms to investors.
An example of this is called Self Financing. Some developers will allow you to pay a large deposit of say 60% of purchase price over 2-3 years while the build occurs, with the remainder being paid by the tenant when they move in, over 4-5 years. The major benefit here is that, if you have a 6-7 years outlook, you will only pay 60% of the purchase price. Plus
you will enjoy beneficial capital growth, allowing you to buy multiple properties with a lump capital amount without mortgages.
Craig Illman, a fellow director, states, “One should buy and hold for 10-15 years minimum as you will enjoy both capital growth and cash flow over this period. Secondly always buy in regeneration areas, don’t buy emotionally, and don’t look at flipping off plan properties as the UK market is not right at this time.’
He concludes, “ Always do your due diligence on the contractor, buy looking at their track record, NHBC registration and whether they offer post construction support in the management of your investment.”