Mortgage in the UK and moving abroad

Life plays out unpredictable scenarios. Even though a mortgage is usually taken out for 20, 25 or even 30 years, it may turn out that after just a few years you have to move out of the house you have bought. From time to time, our clients approach us with questions about the possibility of paying off the mortgage early in order to move to another country. So let’s find out what you need to do if you plan to relocate.

Can I move outside the UK with a mortgage?

The answer is simple: yes, as much as possible. However, you have to meet certain conditions and make a decision about what should happen to your property. For good measure, you have three options to choose from:

• Selling your house or flat combined with an early repayment of your mortgage;

• Renting out your current house or flat, which will involve changing the nature of your mortgage to an investment mortgage;

• Leaving the property without renting it out, which in practice does not change your situation in the eyes of the bank, but may have other financial consequences.

Renting a property bought on credit

If you decide to rent out your home, you need to consider remortgaging - there is a huge possibility that the terms of your mortgage agreement prohibit you from making your home available to strangers for a fee. Even if you are not formally required to register as a landlord, the bank may still find out that you are trying to rent out your property. We probably don’t need to explain that breaching the terms of your contract can result in very considerable inconvenience including termination of your mortgage.

What do I need to do to convert a home mortgage into an investment mortgage?

When deciding whether to convert your residential mortgage into a buy-to-let mortgage, there are a number of requirements that your bank will be making of you:

• LTV ratio of no more than 75% - for investment mortgages, banks require a much higher deposit to mitigate risk. So if you are converting your home mortgage, you need to expect to pay a surcharge - your BTL balance will then be low, but you will need to invest some cash;

• Your affordability - it must be high enough so that you will also be able to pay your new mortgage if the tenant is temporarily insolvent;

• The property must be capable of being rented out - at the lending decision stage, the bank will analyse your home for its potential to be rented out. The amount of rent you will be getting usually needs to match the projected instalment.

As with a remortgage, you need to be aware that premature termination of the mortgage agreement can result in relatively high penalties, which are calculated as a proportion of the outstanding capital, for example 1.5%. In addition, converting a home mortgage into an investment mortgage always involves a relatively extensive procedure that is time-consuming and expensive - you will need around two months and up to £2,000 in legal and broker fees.

Advantages and disadvantages of renting your current property

The advantages of renting an already owned property include:

• Extra income that will come in handy no matter what country you want to stay in;

• The ability to move back to the UK more easily - you can always stop renting your home and therefore, you won’t have to worry about a place to live;

• Property is, in this case, an investment - there is a good chance that your home will increase in value and thus build your financial security. You must, of course, reckon with the risk of losses - crises are unfortunately unpredictable.

The disadvantages of renting, on the other hand, are:

• Having to borrow more money for your new home - if you don’t sell your house or flat in the UK, buying a property in another country will probably require you to raise a deposit in question, the amount of which will depend on the realities of the country you are moving to;

• You are taking out another mortgage - two mortgages (one in the UK and one in another country) is a big financial commitment and you need to be aware that not everyone is creditworthy for this, even taking into account the rental income from the property you already own.

Sale of a home subject to a mortgage in the UK

If renting is not an option for you or you simply do not want to tie yourself to the UK, you can also choose to sell your current property, freeing up capital. In this option, your situation is dependent on you making mortgage repayments.

Selling a house without a mortgage

If you have already paid off your mortgage or have enough savings to overpay itquickly, the matter is very simple - all you need to do is find an estate agent to handle the sale of your home and a conveyancer to handle the whole process from the formal side.

Selling a house with a mortgage

Selling a property with an active mortgage is not unusual - both in the UK and in many developed countries, most homes are sold before the end of the mortgage agreement.

Assuming you no longer wish to live in the UK after the sale of your home, you will not be opting for mortgage porting. Accordingly,** the proceeds of the sale will be transferred to your lender directly through your solicitor**. The difference between the price of the house and the balance of the mortgage will, of course, be returned to your bank account and, as a general rule, this is not taxable. For the record, however, we must point out that your bank may charge early repayment fees.

Leaving the property without renting it

Leaving a property without renting it out is the least preferred option - a handful of people choose to do so. If you want to treat your home as a capital investment, you unfortunately have to reckon with some inconveniences - while property prices in the UK tend to rise month on month, your returns will be limited by potentially higher taxesthat your council may charge on vacant properties, while your electricity and gas suppliers may charge extra for inactive connections.

If your property is mortgaged, the situation becomes more complicated - although many lenders allow you to leave your property unoccupied, your mortgage agreement may oblige you to inform the bank that you are moving.

Complications do arise, however, in the area of property insurance - the vast majority of lenders require an appropriate policy throughout the life of the home. Unfortunately, some insurers require the property to remain occupied - otherwise, insurance contributions can increase dramatically and, in some cases, the contract can be terminated altogether.

Leaving a property in the UK can be costly for yet another reason - as you will no longer be resident in this country, it will be extremely difficult for you to remortgage, making the instalments on your home relatively high. Let’s also point out that the income you earn in another country will not build your UK credit rating, making it all you can do to repay the mortgage you took out before you left.

What to choose then?

We cannot give you advice online - making the best decision about disposing of your property requires a holistic analysis of your financial situation. However, as our statistics show, the vast majority of people choose to sell their UK property while paying off their mortgage.

If you have had your current home for a few years now, you have probably paid off enough of the mortgage and, at the same time, your property has appreciated in value enough that, once it is sold, you will be able to buy a convenient flat in another country for cash or, after borrowing a relatively small amount. Of course, this depends on the price level prevailing in a particular region, but looking at where property prices in the UK are, housing in a large number of countries will be within your reach.

Summary

Each of the above options comes with certain restrictions, but some of them open up entirely new possibilities. The most unprofitable option is to leave the property unoccupied, due to the financial losses associated with higher taxes, charges for inactive connections, insurance premiums and, if you have an outstanding mortgage, higher monthly instalments and greater difficulty in remortgaging.

A more favourable choice would be to rent the property, which allows a steady rental income, but involves refinancing the mortgage into a buy-to-let mortgage, the terms of which are less favourable. The easiest option is to sell the property and pay off the mortgage - then there is the possibility of receiving a satisfactory amount of the difference on account. To choose the best option for you, we encourage you to contact our specialists who will provide professional advice.