Offshore financing can be a challenge when it comes to buying property – these are some of the options available to South Africans.
South African investors are taking advantage of both the extremely low interest rates in the United Kingdom, and the stronger rate of exchange, to leverage their property purchases. Offshore financing can be a challenge when it comes to buying and you need to be aware of your options.
Propwealth, a UK based property company run by South Africans, offers advice for assisting their investors in arranging mortgages.
Anthony Doyle, a director comments , “The UK is the largest residential mortgage market in Europe. Currently, things have become easier and banks are far more willing to lend again. For instance, they will now look to offshore investors investing in properties of £80 000 (about R1.596 million at R19.95/£) and above, down from a £150 000 minimum purchase a few years back, at better rates, and this has opened the market a lot more.”
Propwealth highlights a number of ways to fund your investment in the UK
Option 1 – Cash
Investors who have available cash tend to buy without a mortgage. Remember that you can always refinance once you own the property, as long as it’s over the current minimum purchase level. The plus side is that you can buy a lower priced, non-mortgageable property that always offers higher yields which start at around the 6% net and up to 12 % net, without taking into account any of the benefits of currency fluctuations. Furthermore, many cash buyers are simply looking for a better return on cash than simply leaving the money in a bank.
Option 2 – Mortgage
By leveraging up to 70% to 75% of your property purchase value you are using the bank’s money to buy, and therefore you are able to split your available cash over 2 or 3 properties. Bear in mind that the rent obtained should cover your finance costs and the property running costs, including management fees for further peace of mind.
There are two types of mortgages for residential real estate:
– Capital and interest
This is the one that South Africans are accustomed to. Its repaid over 20-25 years or so and eats away at your capital loan as you repay monthly. Generally most UK homeowners go this way if they live in the property.
– Interest only or Buy to Let
The ”Buy-To-Let” mortgage is a variant of a commercial mortgage. You basically pay off only the interest every month, not the capital, and this improves cash flows immeasurably which is what we are looking for. The usual loan period is 25 years or up to age of 90 years so there is plenty of time for you to enjoy the capital growth. It is important to note that this mortgage is only available if you are resident in the UK or have family who are.
On both types of mortgages, your interest will either be set (fixed) which is usually higher or variable (linked to the Bank Of England Base Rate).
How do I get a mortgage ?
Propwealth offers a pre-approvals concept for their clients. These are ” Offers in Principle” which means that although you have been approved, it all depends on the property and the evaluators or surveyors report ultimately. Lenders take into consideration South Africa assets and income, plus potential rental from the property, the neighbourhood and the style of property. Small or flats above a restaurant, risky neighbourhoods, and certain types of construction are generally difficult to finance.
“There are currently over 1 600 mortgage product available in the UK, so competition to win a client is very stiff,” say Doyle. This is a very good bonus for investors.
He advises, “Always use mortgage brokers who make their money from the banks, so let them shop around for the best deal. Never go to your main bank. Furthermore the financial institution lending the money might be a fund, or even an offshore bank based in another country.”
As a rule of thumb, new, off plan properties nearing completion can only be mortgaged 6 months prior to actual habitation. Pre-approval gives you an opportunity and peace of mind to know that you can afford the investment.
Lastly, usually after a period of time you are allowed to shop around to find better rates and move either mortgage without heavy costs for transferring the mortgage. This is a useful tactic as it improves the yields of your investment.
Option 3 – Creative financing
In the post Covid-19 market in the UK, some developers are offering creative financing methods. One such popular option works as follows:
– A new off plan development allows the buyer to pay the deposit of 60% over 2 years (during the build period) and thereafter the tenant pays the remainder of the purchase price over 5 years. The best part is that you don’t use your entire cash amount up, you have no obligations to a bank, and you end up paying 60% of the value, rather than the full amount (and enjoying any capital growth over that time).
In summary, many investors are combining all three methods of financing. They often snap up lower-end cash deals with higher yields, then use this cash flow to cover any shortfalls on mortgaged, higher end, off plan properties in the larger cities, and finally use this tenant repayment scheme for properties they need to only return rental yields in 6 to 7 years.
Doyle adds, “Propwealth has a variety of fully managed, discounted off plan and completed buy to let properties available with mortgages through both specialised offshore brokers and developer backed financing. These prices start from £80 000 to £ 450 000 and gross yields of 5.5% to 9% while cash buys start at £ 29000 with 10% yields.
“The majority of our South Africa investors are all looking at building a buy-to-let portfolio over the long term. With the interest rate level forecast in the UK looking positive, this is a great time to get into the residential market.”
Propwealth also offers advice on portfolio planning using all three funding options – contact them on invest@propwealth.co.uk or via the website www.propwealth.co.uk
