Be smart with your greatest investment

British expatriates with homes back in the UK could be forgiven for feeling a little bit flush right now. Falling interest rates mean that those paying for their property with tracker or variable mortgage products will have seen their monthly mortgage repayments drop by hundreds of pounds in the past six months. But before booking a luxury holiday, or blowing the extra cash on a shopping spree, these lucky homeowners are being urged instead to put themselves in a better financial place for the future. In the past six months, base rates in the UK have been slashed by 4.5 per cent to just 0.5 per cent, the lowest level in the 315-year history of the Bank of England. That means someone with a £200,000 (Dh1.2 million) 20-year repayment mortgage on a property will have seen their monthly repayments fall by £460. The point, though, is that these are unprecedentedly low interest rates and no one is expecting mortgage rates to remain as low for long. Indeed, HSBC in the UK recently wrote to 30,000 of its customers to advise them to use this windfall money to pay off some of the outstanding value of their home loans. Martin van der Heijden, HSBC's head of mortgages in the UK, said: "Interest rates will increase at some point and it will feel painful for those borrowers who have soaked up the benefit of lower mortgage payments by extending their spending habits." Overpayments now will reduce the cost of a future repayments once interests start to go up. Lloyds TSB has also let 27,000 of its customers make overpayments on their mortgages since rates began falling. It points out that redirecting this extra cash to overpayments will cut years off the length of a mortgage, as well as cut the eventual interest bill by tens of thousands of pounds. However there is another reason expatriates should give serious thought to paying down their mortgage while they can. The days of banks lending 100 per cent of a property's value are long gone, and it is very unlikely that they will ever be back. Lord Turner, the chairman of the UK's Financial Services Authority, the country's financial ombudsman, has suggested that regulation should be considered to cap mortgage lending. One of the options would be to limit the proportion of a property's value a bank could lend, to perhaps 75 per cent. Even before any change in the law, however, banks have already imposed a cap of sorts on mortgage lending. To access the best remortgage products, borrowers now need to have at least 25 per cent equity in their property. With house prices falling, homeowners also need to keep an eye on the value of their mortgage relative to their property price, if they do not want to get caught out. The UK's Land Registry says house prices have fallen by 17 per cent in the past year. Expatriates can get an idea of their property's current value at www.myhouseprice.co.uk. Paul Beard, the managing director of Alexander Beard Group, which is based in the UK but has clients across the GCC, said: "Let's say you have someone with a three-year 90 per cent mortgage on their property they took out before they went abroad, and it comes up for renewal this summer. They might find that not only will the lender not offer them a better rate, but the lender might actually turn round and say, 'Well, you know what, we won't lend to that loan-to-value any more, take your business elsewhere.' And if they can't remortgage, that will mean the lender can put them on its highest rate. People are going to get caught out. It could be even more difficult, Mr Beard said, if the value of the property has fallen. It is possible, he said, to see a situation where someone took a 90 per cent mortgage out on a house three years ago, and falling property values mean the mortgage is now equal to 100 per cent of the new value of their home. Meanwhile, expatriates who have sensibly opted to rent out their family home back in the UK could be in for a shock the next time they come to look for a new tenant. Rents in the UK are also falling, and expected to fall further. Average rents in the UK are down almost 5 per cent year on year, according to the most recent rental index from Findaproperty.com. It said that average rents in February were £830 a calendar month, down from £872 in February last year. Regional variations, of course, mean that some parts of the UK are seeing rents fall even faster - the North-west of England saw a 14 per cent year-on-year decline, from £645 to £592. Expatriates with a home in Scotland can check what the current average rent is for their size of property and postcode at www.citylets.co.uk, while those with property in England and Wales can access regional breakdowns at www.findaproperty.com. Looking after a property from overseas for most people will mean using the services of a letting agent or management company to ensure the property is kept in order. However, expatriates might want to take a look at what they are paying for when it comes to the services provided by their letting agent. Smartlandlord.co.uk, a new property services website for landlords, and available for use by expatriates, claims that owners of the UK's 3.2 million homes for rent in the private sector that are managed by lettings agents are collectively being cheated out of £3 billion every year. It bases this claim on the fact that lettings agents typically charge 12 per cent of the annual rent for marketing a property to prospective tenants. This works out at £1,550 a year. By contrast, Smartlandlord charges just £100. It will also provide tenancy agreements free of charge. Agents charge up to £200 for such agreements. Keshav Thukaram, the managing director of smartlandlord.co.uk, said: "There are more landlords in the UK than ever before, as people who can't sell their properties try to rent them out. But they're being taken to the cleaners by greedy lettings agents who are milking them for everything they're worth. In an economic environment like this one, where landlords face stagnant or falling rents, there's a rapidly growing number of landlords who can't afford to sit back and let their investments be managed by other people. They need to seize control of their property investments if they want to optimise their returns." Perhaps most worrying of all is research published in March by the UK's National Association of Landlords, which found that one in three people who had property rented out had tenants who were in arrears with their rent. The association said that when faced with tenants not paying rent, only 50 per cent of owners went to court to get the money they were owed, and those who did reported frustration at the slowness of the system. It can take three months for a case to be heard. One way to avoid the possibility of rent arrears, as well as void periods (where a property is empty between tenants), is to let for the long term through the local council's private sector leasing scheme, or PSLS. Indeed, as many postings abroad are for a set period, signing up for the PSLS could be viewed as sensible financial planning. The double whammy of the collapse in building new homes alongside the rise in repossessions (up 68 per cent last year according to the Financial Services Authority in the UK and expected to rise further this year) is also likely to boost the demand from local councils for private rental properties, with homeowners agreeing to rent out their property to tenants supplied by the council for up to five years. Rents typically match what an owner would get on the private market, less a management fee which is normally around 10 to 15 per cent. Rents are paid quarterly in advance, and because there are no void periods and all legal and final redecoration costs will be paid by the scheme, it should mean that those renting out property through a PSLS come out better than those opting to let their homes on the open market. Andrew Morrison, the director of policy and business development at Orchard & Shipman, a PSLS management company, said: "In previous recessions, homelessness has risen, with a consequent increase in local authorities' need for additional accommodation. Orchard & Shipman has more than 1,850 properties under management in Scotland, with contracts for a further 1,000. "We are in advanced talks with a further five local authorities and expect to announce new schemes by the summer. We also have over 1,100 properties under management in London and, as in Scotland, we have expectations of further contract wins in 2009." There is one more problem expatriates who lease out their homes in the UK face. Some banks are telling homeowners not living in the property when they try to remortgage that they will have to switch to a more expensive buy-to-let loan, typically at rates of interest two percentage points higher than residential loans. However, the Financial Service Authority's mortgage code is clear on this point. It says that as long as a borrower has a reasonable expectation of returning to live in their property, then they are eligible for a residential mortgage. The importance of staying on a residential loan cannot be overstated. It is not just about better rates: buy-to-let loans in the UK are not regulated by the Financial Services Authority and thus do not have the same regulatory protection as regular mortgages. Homeowners cannot complain to the financial ombudsman if anything goes wrong. However, expatriates who give careful consideration to how they pay for their property back home now have a once in a lifetime opportunity to put themselves on a sound financial footing, provided they are savvy enough not to just rush out and blow the extra cash in their bank accounts as a result of falling interest rates.