Pros and cons of using a UK mortgage to buy property as an expat or non-UK national

General information only. This guide explains how UK lenders usually approach buy-to-let and residential mortgages for people living outside the UK, whether they are British expats or nationals of other countries. It is not advice and not an offer of lending. Every lender has its own criteria, and they change often, so speak to a mortgage adviser before making any decision.

The short answer

For most people living abroad, a UK mortgage is a practical way to buy UK property without tying up all of their savings. The most common reason is investment: a buy-to-let flat or house that earns rent in pounds and, over time, may grow in value. British expats and non-UK nationals also use UK mortgages to buy a home for their return, a base for visits or a flat for children at university.

It is not right for everyone. The extra cost of borrowing as an expat, the higher stamp duty for overseas buyers and, for landlords, possible empty periods, running costs and tax all need weighing against the benefits. This guide sets out both sides, first for any purchase, then for buy-to-let investors and for buyers of a home to live in.

Pros and cons at a glance

The advantages

You can buy without paying the full price. Most expat lenders lend up to 75% of the property's value, so a £400,000 home needs a deposit of around £100,000 plus buying costs, not £400,000. That can bring a UK home within reach years earlier than saving the full price.

Your savings stay working. Money you do not put into the property can stay invested, cover an emergency fund, pay school fees or fund a business. Once money is in bricks and mortar, it is slow and costly to get it back out.

Borrowing in pounds against a property valued in pounds. When you sell, the debt is repaid from a sale price in the same currency, so the exchange rate does not change what you owe against the property.

Gearing works on your deposit. If a £400,000 home bought with a £100,000 deposit rises in value by 10%, the £40,000 gain is 40% of the money you put in, before costs. This works in reverse too: a fall in value comes off your deposit first.

Certainty of payments. Two and five year fixed rates are common, so your monthly payment in pounds is set for that period, which makes budgeting easier.

A UK credit history. Paying a UK mortgage on time builds a UK credit record. That helps when you remortgage, buy again or return to the UK, and is especially useful for non-UK nationals who have no UK history yet.

Possible tax advantages. A mortgage may also help with tax planning. UK property is within the scope of UK inheritance tax wherever you live, and a mortgage secured on the property can, in some circumstances, reduce the value of your estate for inheritance tax. For landlords, mortgage costs can also be relevant to the tax on rental income. The rules are detailed and depend on your circumstances, so take advice from a tax adviser before relying on any tax benefit.

Sharia-compliant options. If you prefer not to pay interest, Sharia-compliant Home Purchase Plans are available, where you pay rent on the provider's share instead of interest. Read our guide to Sharia-compliant UK home finance.

The disadvantages

Higher rates than UK residents. Expat and foreign national mortgages usually cost more than the deals advertised to UK residents, because fewer lenders compete for them and lenders see more risk in lending to someone abroad. Check current figures with our expat mortgage calculator, which shows the range of rates we see.

Fewer lenders and stricter rules. Most high street banks do not lend to people living overseas. The market is made up of specialist expat lenders, the international arms of UK banks, some building societies and private banks. Some only accept certain countries of residence, some only lend to UK nationals and some limit lending to particular nationalities. Non-UK nationals buying a home to live in may also be asked about their visa or residence plans.

A larger deposit. Many UK residents buy with 5% or 10%. As an expat or overseas buyer, you should usually plan for 25% or more, plus stamp duty and fees, and lenders will want proof of where the deposit came from.

Exchange rate risk. If you earn in dirhams, riyals, dollars or any other currency and your own income pays the mortgage, it can cost more if the pound strengthens. Where income is paid in a foreign currency, changes in exchange rates may affect the amount you need to repay in sterling. With a buy-to-let, the rent in pounds usually covers the payments, which reduces this risk.

More paperwork, more time. Expect to provide more documents than a UK buyer, sometimes certified or translated, and allow longer for the application. Credit checks can also be harder if you have little or no UK credit history.

Costs and early repayment charges. Lender arrangement fees, a valuation, legal fees and an adviser's fee all add up. Leaving a fixed rate early usually costs a percentage of the loan.

Rates can rise when your deal ends. When a fixed rate finishes you will need a new deal, and the choice of lenders for expats is narrower than for UK residents. Plan for the rate you might pay then, not only the one you pay now.

The property is at risk. As with any mortgage, the property can be repossessed if you do not keep up the repayments.

Buy-to-let as an investment

Most expats who use a UK mortgage are buying to let. A buy-to-let mortgage is the opposite of a mortgage on a home: the property is bought to be let to tenants from day one, so no consent to let is needed, and you and your family generally cannot live in it. The lender looks mainly at the rent the property will earn. Lenders usually lend up to 75% of the value and test that the rent covers the interest at a stress rate, usually by 145% for individuals and 125% for limited companies. For example, a rent of £2,000 a month at 145% means the interest at the lender's stress rate can be no more than about £1,379 a month.

Advantages for investors

• The rent pays the mortgage. Rent is paid in pounds and the mortgage is paid in pounds, so the property can carry its own costs without you sending money from abroad each month.
• Borrowing is based on the rent. Because the loan depends mainly on the rent, your foreign currency income matters less than for a home, although many lenders still set a minimum personal income.
• Interest-only is common. Most buy-to-let mortgages are interest-only, which keeps monthly payments lower and leaves more of the rent as income. The loan itself is repaid when you sell or refinance.
• Two sources of return. Rental income now, and any growth in the property's value later, both earned on a deposit of around 25%.
• Limited company option. Many investors buy through a UK limited company (often called an SPV), which can suit those planning several properties. The tax treatment differs from owning personally, so take tax advice first.
• Equity for the next purchase. As the value grows, you may be able to remortgage to release equity towards another property. See our guide to remortgaging while living abroad.

Disadvantages for investors

• The rent test can limit the loan. Where rents are low compared with prices, as in much of London, the rent may not support 75% of the value, so you need a larger deposit.
• Higher stamp duty. Most investors already own a home somewhere, so they pay the 5% additional property surcharge as well as the 2% non-resident surcharge. Companies always pay the 5% surcharge.
• Possible empty periods and running costs. There may be empty periods between tenants, so allow for them, along with letting and management fees (most expats use a managing agent), repairs, insurance, service charges and ground rent on flats.
• Landlord rules. Landlords must meet safety and energy standards, protect tenants' deposits and follow letting rules that change from time to time. A good managing agent handles most of this, for a fee.
• Tax on the rent. Rent is usually taxable in the UK. Under the Non-Resident Landlord Scheme, your agent normally deducts basic rate tax unless HMRC approves you to receive the rent in full. Individual landlords do not deduct mortgage interest as an expense; they receive a basic rate tax credit instead.
• Rates and fees. Buy-to-let rates and fees are often higher than for a home, and limited company rates are often higher again.

Our expat buy-to-let mortgage calculator works out how much you could borrow from the rent and what it would cost each month.

Buying a home to live in

If you are buying a home for your return, for family or for children at university, the lender looks at your income instead of rent. Many lenders use around 4.5 times your income as a guide once it has been converted into pounds, and often reduce foreign income, commonly by 10% to 25%, to allow for exchange rate movements. Our guide to UK mortgages with Gulf currency income shows how this works in practice.

A mortgage on a home that you or a close family member will live in is generally regulated by the Financial Conduct Authority, which gives you advice standards and access to the Financial Ombudsman Service. These mortgages are usually on a repayment basis. Because the mortgage is for a home, you cannot let it out without your lender's consent. If your plans change, you may be able to let it later with that consent, usually for a fee and a limited period, or remortgage it to a buy-to-let.

Stamp duty for overseas buyers

Stamp duty applies whether you use a mortgage or pay cash, but it is a real part of the budget. In England and Northern Ireland, buyers who have spent fewer than 183 days in the UK in the 12 months before buying pay a 2% non-resident surcharge. If you will own another home anywhere in the world, including in the country where you live, you also pay the 5% additional property surcharge. First-time buyer relief is still available to non-residents who have never owned a home anywhere, with the 2% added. Approximate figures on a £400,000 home:

These are estimates. Your solicitor calculates the actual stamp duty, not your mortgage broker. Scotland and Wales have their own taxes. Our stamp duty and buying costs calculator adds up stamp duty, the deposit and fees for your own figures.

Owning UK property from abroad

A few points apply to owning UK property while living overseas, with or without a mortgage, and are worth knowing before you buy:

• A home left empty. If a home may be empty for long spells, check the buildings insurance and the lender's conditions, and budget for council tax, service charges and upkeep.
• Letting a home. Consent to let only applies to a property bought as a home on a residential mortgage: you cannot let it without your lender's consent. A buy-to-let mortgage is the opposite, as the property is meant to be let and you cannot live in it yourself.
• Selling it. Non-UK residents must report the sale of UK property to HMRC within 60 days of completion, even if there is no tax to pay, and UK Capital Gains Tax can apply.
• Inheritance. UK residential property can be within the scope of UK inheritance tax wherever the owner lives.

Tax depends on your circumstances and where you live, so speak to a tax adviser.

Mortgage, cash or borrowing at home?

Some buyers use a mix: a larger deposit to lower the loan and the monthly payment, while keeping a cash reserve. A mortgage can also be repaid early later, subject to any early repayment charge.

Who a UK mortgage suits

A UK mortgage often makes sense if you:

• want a property investment where the rent covers the mortgage
• have the deposit and buying costs but would rather not tie up all your savings
• expect to return to the UK, or want a UK base for your family or children at university
• have a stable income that can cover the payments even if the exchange rate moves against you
• want to build a UK credit history

It may suit you less if your income is irregular or in a very volatile currency, if you plan to sell within a couple of years or if you have ample cash and would earn less on it elsewhere than the mortgage would cost.

Before you decide

• Work out your budget in full: deposit, stamp duty, legal fees, valuation and lender fees. Our calculator shows how much you could borrow and what it would cost each month.
• For a buy-to-let, check the rent. Get a letting agent's rental estimate and run the numbers with an allowance for any empty periods, fees and repairs.
• For a home, test the exchange rate. Check your payments if your currency fell by 10% or 20% against the pound.
• Keep a UK footprint. A UK bank account and a UK credit card you use and clear each month help lenders see your history.
• Get your documents ready: passport, proof of address abroad and residence visa where relevant, payslips or salary certificate, bank statements and proof of where the deposit came from.
• Avoid applying to several lenders yourself. Each application can leave a mark on your credit file. A Decision in Principle from a lender that accepts your country and nationality tells you where you stand first.

For more on how lenders treat your country of residence, see our guides for the Gulf, Dubai, Hong Kong and Singapore and Malaysia.