UK property market: Why mortgage policy matters
Insights on the UK property market and the impact of mortgage policy on foreign property buyers.
As part of the measures announced by the Bank of England in 2014 to tighten mortgage-lending rules, borrowers have to undergo more stringent screening tests to ascertain their assets and ability to repay loans. This has the effect of eliminating bad debts and slowing down the surge in property prices.
This was a successful move mainly because the rise in property prices back then was greater than the increase in average incomes. The Bank of England restricted mortgages to protect the market from a property bubble. At that time, even leading UK developer, Berkeley Group, persuaded the Bank of England to increase interest rates to slow down the growth in property prices and preserve a more balanced market.
What overseas property buyers need to be aware of
Similar to what is practiced in Hong Kong, anyone wishing to apply for a mortgage in the UK will have to meet the bank’s mortgage criteria, which has contributed to a record-high level of prime rate at 6 percent.
Many of my Hong Kong clients want to know if banks in Hong Kong can offer a mortgage for their UK properties. They fail to see that most Hong Kong- or Chinese-owned banks are there to serve the local needs of customers. In other words, only the UK branches of these banks can conduct screening tests for UK property mortgages.
Another thing to look out for is that overseas borrowers will, on average, obtain a mortgage that’s 2.5 to 5 percent lower than Britons, as banks need to hedge against the risk of lending to foreigners.
These banks may also include a person’s borrowings outside the UK in their mortgage screening tests (such as any property mortgages or private loans in Hong Kong). Before, it was possible to obtain a mortgage based on an individual’s total assets. Nowadays, except for some high-net-worth clients, banks would require evidence of a steady income in order to approve a mortgage.
Ideal time to enter the UK property market
In the last few years, the number of bad debts among UK banks has dipped to a new low, with many banks experiencing an oversupply of cash. Most property owners in the UK are also holding on to their properties for longer-term investment, while there are working professionals who can meet the bank’s mortgage criteria.
As such, it is almost impossible to expect these owners to sell their properties at below market value. This goes to show how robust the UK property market is.
In addition, some banks have recently launched mortgage products that require only the repayment of interest instead of full repayment of loans. Such products were unavailable during the economic crisis in Hong Kong in 2008. For many, this is the perfect signpost for entry into the UK property market.