Although official guidelines do not come in to force until April, many UK banks are already “stress testing” a mortgage applicant based on their ability to meet higher interest rates. But the UK is not alone in using this method.
The process of stress testing is also happening in other parts of Europe, particularly in those countries which suffered heavily during the recent economic crisis. In countries such as Italy, Spain and Ireland, lenders can even allow up to 3% more than the current rate when assessing the potential mortgage.
This can have both a positive and negative impact on the individual applying for the mortgage. It is good in the sense that it ensures the client does not overstretch and take on a debt that they may not be able to afford in the future, but the downside is that it could restrict the amount they can borrow from the outset and even result in them being turned down completely.
Therefore, it is important that people are aware of what they will be assessed on when applying for an overseas mortgage.
Lenders will calculate the amount someone can borrow based on a percentage of their net personal income, after tax and minus any existing debt payments. The net income includes salary, dividends, pension and in some cases benefits, such as disability benefit etc. It does not, however, include any rental income the applicant receives.
The percentage used can vary, but popular countries such as France, Spain and Portugal calculate how much can be borrowed based on 33% of the net income. In Italy it can be as low as 30%.
For example, if an applicant’s personal income after tax is £1,000 per month which will mean repayments of £330 per month (ie: £ 1,000 x 33%), less any existing mortgage payments of £200 per month, leaving £ 130 per month to spend on any additional liabilities – i.e. an overseas mortgage. Some lenders may base the calculation on as high as 35% of net income, but this is on a case by case basis.
If someone is self-employed, then ideally they must have been self-employed for at least 3 years, with 2 year’s profitable audited accounts, preferably produced by an international firm of accountants.
Overseas lenders have definitely got tougher when approving mortgage applications and as well as assessing an individual’s income, they also want to know everything about their monthly outgoings. Recently I have witnessed lenders take even the smallest expenses into account, such as subscriptions to clubs, lottery tickets and magazines and in some cases, I have even seen lenders trying to establish what pocket money clients pay to their children!
When looking at existing credit card debt a client has, applicants should be aware that some lenders will base their calculations on the credit limit on the card, not the current balance. For example if the limit is £10,000, but only £3,000 is currently owed, they will assume that as someone is able to spend up to £10,000, they could potentially be a higher risk in the future.
Some lenders assess overdrafts in a similar way to credit cards and base their calculations on the overdraft limit, but others will evaluate it based on the current amount owed. Also, with overdrafts it is important to not be constantly near or occasionally exceeding the limit, as this could have an impact on the lender’s decision.
It is also important to understand that Southern Europe is not such a “Home Ownership” society compared to Northern Europe and a large local population rent, rather than own their property (they often defer home ownership until a later age compared to their “northern counterparts”).
In conclusion, lenders do find foreign ownership of a property a higher risk and are therefore conscious of potential future defaults with the added possible high cost of recovery of any debt.