Getting mortgage pre-approval to ensure a safe landing on your dream home in the UK【星之谷專欄－南華早報】

Hongkongers have emerged as among the most aggressive buyers of UK property, snapping up more than £305.6 million (US$430 million) of prime London homes in 2020. This trend is expected to continue under a new wave of emigration, as BN(O) passport holders are allowed to live in the UK under the new visa scheme.

While such a buying frenzy can be partly attributed to impulsiveness since very little down payment is required to be a UK landlord, the aftermath – in the form of a mortgage – can be a daunting task. Applying for a mortgage can feel overwhelming and intimidating to many borrowers. In addition, the approval process for UK mortgage can be vastly different from, and more stringent than, that of a Hong Kong bank.

Homebuyers could be disappointed when they are drawn to the refurbished kitchens and spaciously planted gardens of their dream home and hastily sign the exchange contract, only to discover that the mortgage denial turns dream house into nightmare, for reasons that can range from income profile to title deeds issue.

Many clients ask me if there is a way to get a mortgage pre-approval for a firm indication of borrowing power before house-hunting in the UK?

The answer, fortunately, is a resounding yes. Some UK banks offer mortgage pre-approval before purchasing a property. Borrowers indicate the amount of loan needed and provide proof of income, as is the normal application procedure. Upon approval by the bank, a certificate of Agreement In Principle (AIP), which states the maximum amount of loan the bank is willing to lend, will be issued.

The AIP certificate usually carries a validity of up to three months. Hongkongers can then purchase their homes in the UK within the time frame.

If they move onto the formal application via the AIP bank, they may not have to go through the time-consuming approval process again. This is highly desirable if speed is paramount after making a deal.
On the other hand, if one gets rejected at the AIP stage, the buyer could try to resolve the credit issue before flocking into the UK property market too soon.

However, an AIP does not guarantee an official mortgage offer. It can be perceived as a “memorandum of understanding” (MoU) which outlines that the bank is willing to approve the mortgage based on information provided. Other reasons may still affect the outcome when it comes to formal application, such as issues related to the title deeds of the house, valuation etc.

Even though the loan offer might not be highly desired, you are empowered to put in an offer on your dream house based on your affordability, knowing you do have the funds in place.

From a transaction standpoint, an AIP certainly gives both the seller and the buyer added reassurance around borrowing prospects, as it helps sellers whittle out “time wasters”. Many UK landlords are reluctant to sell their house to foreigners, since there is no initial deposit required by law and buyers can simply walk away from deals any time before completion.

While banks differ regarding their stringency in granting AIP, medium-sized and smaller banks tend to be more lenient in the approval. Some even provide “instant AIP approval” with very few documents required. Indeed, easy approval comes at the cost of a higher interest rate as the lack of information prompts banks to assume the borrower’s financial condition might not be straightforward. However, an AIP is not legally binding but serves as a contingency plan. After purchasing the house, you can still consult other banks for the best bargain.

Bear in mind that the maximum loan-to-value (LTV) ratio caps at 75 per cent according to government regulation. An AIP, for instance, approves a loan of £300,000, and at the same time, the flat price is also £300,000. During formal application, the maximum you could borrow would be £225,000, which is 75 per cent of the purchase price. Furthermore, the “Help to Buy” scheme enables first-time buyers to borrow up to 95 per cent of the house price for those work in the UK and on a UK-based payroll. However, getting a job in the UK is not easy these days.

Raymond Chong