Case Studies

• Serial buy-to-let landlord
  
• Self-employed, dividend income
  
• Getting married
  
• Older applicant
• Turkish mortgage and Credit Crunch
• Slovak mortgage, older property
  
• Post Script

Serial Buy-To-Let Landlord

We received an application from two British women who wanted a mortgage to buy a good quality Czech property together, then rent it out. Both had good jobs in the UK. Both were married and the families were friends. Each of the two families owned their own UK homes on a mortgage. Between them, the two families owned a further 4 BTL properties in the UK, which were also mortgaged. This was therefore an application for their 7th concurrent mortgage.

A Czech, Slovak or Turkish bank is confident about what it is looking at, when such an application is made from a national of their own country, who also pays tax according to rules they understand. But they are not at all confident about the real financial circumstances of a “foreigner” with a profile which is complicated, and involves heavy outgoings as well as income.

The two women had reserved the property together, using both their personal names. They wanted to complete the purchase by switching to ownership through a local limited liability company, for financial management reasons. They had committed to a 25% deposit and a 75% mortgage at the exchange-of-contract stage, but wished to swap to a 15% deposit and 85% mortgage at completion. Lastly they were buying a property, which was off-plan and came without an installed kitchen (this is not uncommon), although it did come with a separately-priced parking space; they wanted to know whether the price of a kitchen installation or the parking space could be added to the mortgage. These are typical of the issues which cannot be taken for granted and should be negotiated through your broker.

This was a difficult mortgage to arrange. The bank wanted to know about the two husband’s financial circumstances even though they were not mentioned on the title deeds, nor co-applicants to the mortgage. This is because under both Czech and Slovak law, property is treated differently in the event of divorce. For non-Czechs, this can lead to confusion about how many Residence Permits (perhaps) are needed, which names must be on the title deeds and which names are on the mortgage application (in order to secure title for the bank in the event of default). You should use your broker and lawyer to reconcile this for you at an early stage.

The bank took into account the mortgage commitments the two women and their husbands shared across their whole UK portfolio, then treated this repayment obligation more conservatively than would have been the case in the UK. Czech, Slovak and Turkish banks do not offset BTL mortgages and rentals as British banks do and much of our time is spent explaining why serial landlords are good applicants (more than 50% of our applicants are serial landlords).

At first, the bank offered a harsh interest rate since the request for the Loan-To-Value increase made them suspicious of the risk of undeclared financial hardship. Czech Finance had to explain the logic of using a high LTV% to preserve funds for future deposits, as a standard feature of a UK/Irish investor’s business case and thus evidence of prudence. The cultural norm in many European countries, is to expect a mortgage applicant to be buying a home for themselves, so there is little framework from which the banks can consider applicants with an investment mentality.

The anticipated rental the Czech property might fetch was not allowed for pre-scoring since there was no signed future rental contract to support it, despite having presented evidence of rental estimates provided by letting agencies. There was significant extra time taken to amend the paperwork to shift the ownership technicality away from the two women as individuals, over to the Czech limited liability company they had formed and separately, to amend their purchase contract to reflect the new deposit amount. Such changes always have to be treated properly under law with all stakeholders (seller, each buyer, mortgage bank) signing everything and it being notarised.

There was an 11th hour alarm when the bank asked for proof that 3 HP loans showing as settled 4 years previously on the applicants’ credit reports, really had been settled. Lastly, the bank agreed to include the parking space in the mortgage loan, but not the anticipated cost of the kitchen. After a lot of discussion with the bank the outcome was however, successful. The deposit money which had been saved through increasing the LTV%, was used to install the kitchen.

It is worth pointing out that this bank is a very good bank. The problems in cases such as this arise from the bank not knowing how to view the applicant, so choosing caution rather than risk. The applicant often feels frustrated since they see the loan as a simple piece of business and do not understand how the bank assesses risk. Brokers are relied upon to understand, explain and get the best outcome for each party.

Some Czech banks take nearly all their Czech mortgage applicants as direct business. Their applications from foreigners are nearly always via brokers. This is not just because the applicants find it convenient – it is because the banks have no in-house understanding of UK law, lending culture, tax, National Insurance, employment rights, pension rules or consumer behaviour, so they favour brokers which do.

Self Employed, Dividend Income

Two men had reserved three good quality properties, paid the deposits and wanted 85% mortgages to complete in their own names with Residence Permits, then rent out. One of the men was married in the UK, while the other was single. The married man owned the family home on a mortgage and his wife worked in conventional employment. The single man lived with his parents. Both men were self-employed, owning 50% each of the company they worked for. This company paid each of them a minimal salary, topping it up with dividend payments. The dividends declared over the previous 3 years had been up and down, then up again. The dividends had been withdrawn in irregular piecemeal amounts, which were difficult to isolate from other payments on the bank statements. Lastly there were some minor credit report issues, for which the bank wanted explanations.

The difficulties with this mortgage began by the bank misinterpreting the dates of the UK tax year, which don’t match those of the Czech tax year. This created a misunderstanding of which accounts reflected which calendar period and seriously jeopardised the pre-scoring. There was considerable time spent helping the bank to feel comfortable with how the financial results and the dividend payments paid would look, if accounted for over Czech tax years.

The difficulties moved on to finding it a struggle to pre-score successfully for mortgages on all 3 of the new properties, when most banks felt the applicants earned enough to qualify for only 2 new mortgages. At first we tried to resolve this by offering both men’s fathers as guarantors – but they were married and so the bank pointed out that under Czech rules, this meant that all 4 men and all 3 wives would have to be included as co-applicants, making 7 co-applicants and thus exceeding their limit of 4 applicants per mortgage. We eventually resolved the pre-scoring by finding a bank which offered a much longer term than usual, spreading the repayments over more years and thus reducing the repayments due on 3 mortgages each month, making them affordable after all, without any guarantors. The wife of the married applicant had to be included in the pre-scoring, despite not being mentioned on the property contract.

A new difficulty arose in that the dividend income each year had been erratic – would the bank allow an average over all 3 years, an average over the last 2 years, or simply either the worst or the best year? We talked it through with the bank and settled on an amount, which achieved all 3 mortgages. Proving that these dividend payments had really been made became a problem – we went through a complete year’s worth of company bank statements and personal bank statements for each man, separating out the credits for dividend income, salary income and the reimbursement of normal business expenses; the sums didn’t match what showed on the accounts, so we had to understand why and get an accountant’s report to explain it to the bank’s satisfaction.

With work from the UK we managed to satisfy the bank regarding the credit reports and then at the final hurdle, the bank’s risk assessment desk lost confidence again. It asked for the equivalent amount to be provided in writing as a spoof quote from a UK mortgage bank, using the same named applicants and the same financial profiles. This too was difficult, since UK interest rates are higher and these applicants were already borrowing close to their limit. However, with some hard work in the UK as well as in the Czech Republic, including bringing the applicant’s company and personal accounts and tax returns up to date earlier than required in the UK, we achieved a successful outcome for all 3 mortgages. This mortgage application included the submission of 8 kg of supportive documentation, which is a record for Czech Finance. The bank confessed that it had never worked so hard on an application either, thanked us for our hard work and in acknowledgment of the confidence it felt it could henceforth place in us, waived the application fee for the third mortgage. We passed this saving straight on to the client.

Getting Married

A British mortgage applicant was engaged to marry his Czech fiancée. By chance, the date of the wedding was very close to the dates of completion of the 2 apartments they wanted to buy. To complicate things further, one of the apartments was to have the new mother-in-law mentioned on the title deeds as well – this meant a mixture of nationalities, a mixture of different types of income in two currencies and under two tax regimes, the possible restriction of one of the mortgages to a term which would end very quickly upon the mother-in-law’s retirement (despite the mortgage being affordable by her new young son-in-law who was co-owner) and a change of applicable legal documentation requirements once the two main applicants got married. This made it difficult to gather the correct documentation (since it could not exist until the marriage had taken place) ready for the bank, then subsequent confusion when the bank over-rode the law through a legal misinterpretation of its own and demanded a Residence Permit which was not technically necessary for the British man, now married to a Czech wife.

The easy part of this mortgage application was that everybody was conventionally employed and had a good profile of income compared to existing monthly debt repayments. Although the man also had a BTL property in the UK, we did the calculations using the bank’s rules and felt the properties could all be afforded. The hard part of this application was scrambling around the wedding date to suddenly put in place all the new post-marriage documentation, which would be required at short notice for completion. The developer – although this is unusual – would not at first supply the property documentation required by the bank and was reluctant to explain why. It transpired they had their own commercial arrangement with a different mortgage bank and wanted us to use that one – although that bank’s rules were designed for Czechs and simply would not work for this client. In the end though, successful long-term mortgages were arranged on both properties, as the applicants wished.

Older Applicant

An applicant with a high UK employed salary and little debt to speak of, asked for 4 Czech mortgages. This applicant would have been welcomed by a UK, American or Irish bank. The problem in the Czech Republic was that the applicant was 62 years old at his next birthday; many Czech banks and all Slovak banks require the last repayment to be made upon your 65th birthday at the latest and they also have a minimum term for any new mortgage, of 5 years (typically). Turkish banks and a proportion of Czech banks allow a higher maximum age of 70 or more.

However, we have provided this last case study as proof that most mortgages fly through without any serious panic! Although we did have to search for a bank which would accept this applicant, then find a way to resolve the mortgage-related life insurance issues which also arose due to age, the case was comparatively easy – the majority of them are!

Turkish Mortgage & Credit Crunch

A professional ocean-going yachtsman wanted a mortgage for a property in Turkey. The mortgage industry in Turkey only became accessible to foreigners for the first time in 2007. The client contacted us towards the end of 2007 and clearly had excellent income, with hardly any debt. Financially, he pre-scored very well indeed according to the bank’s rules. However, the bank had no experience of having to be flexible for underwriting documents for an unusual foreigner.

This client spent nearly all his time at sea and paid no income tax in any country – legally. He was employed, but without conventional pay-slips because his employer went to sea with him, for several months at a time. He had been born in the UK, but had moved his main residence to Spain. However, his employer was based in Germany and the untaxed income was paid from there. The client had bank accounts in at least 3 different countries, didn’t really live in any of them, and could not provide documents which the bank had asked for, stating that the correct amount of tax had been deducted from his payslips (which showed none deducted), since the tax authorities in all three countries were happy not to tax him. They had effectively deleted him from their systems.

The inexperienced Turkish bank had not come across this before and felt cautious. Never the less, we switched the application to a different Turkish bank early in 2008. This bank was flexible enough to use different documents to underwrite the application, relying on the applicant’s excellent credit report. The new bank made a Mortgage Offer but the parties did not sign it immediately.

Funds are rarely released until the property is ready – it was a new-build and completion was several months away. During the waiting period, the Turkish government suspended the ability of any foreigner to acquire property in Turkey, for 3 months. This was because their national systems and processes were becoming overloaded and had to be shut down for overhaul. While this went on, the Credit Crunch gathered pace. By the time the Turkish system overhaul was completed and the process there became possible again, the new bank too was becoming cautious.

It asked for fresh documents to be submitted from the client, in case his financial circumstances had changed. The client honoured this, but the bank had decided not to be “flexible” any longer and insisted on the listed documents which this particular client could not supply. It withdrew the unsigned Mortgage Offer.

Completion was becoming imminent, the applicant had to return to sea for 5 months until after the completion deadline, and yet it was necessary to find a third bank – and then worry about supplying a third set of correct documents to support the application.

At the time of updating this case-study (February 2009), the client has been placed with a third bank. The property is ready for legal completion, but both the client and the developer have yet to provide one more document before funds can be released. This case is still not finished and it represents the most difficult “foreigner” mortgage we have done in Turkey.

Other “foreigner” clients who have been conventionally employed, and taxed in the normal way, have had a much easier time applying for mortgages in Turkey. Self-employed clients can also get mortgages there, even though there are fewer banks to choose from.

Slovak mortgage, older property

A non-Slovak client had identified an older property in Slovakia and paid a 20% deposit for it, before contacting us for a mortgage, and before contacting a lawyer or a valuation surveyor. They were hoping for an 80% LTV mortgage.

We explained the process, that on all older properties (and often on new ones), a valuation survey is needed by the bank, as part of the mortgage application. Sometimes the bank will do this for no charge, but in this case, the client’s profile and requirement for 80% LTV meant that we had to use a bank which insisted on the client paying an for independent valuation report. We arranged this.

The valuation surveyor did the normal land, ownership and planning searches at the land registry, and visited the property. Unfortunately, there were 3 reasons why the mortgage could not work:

Firstly, the property had been built on land which belonged to the very large garden of a different property under different ownership. This would not mattered if the right of access had been legally formalised. However, it had not been. Mortgage banks always regard the right of access to a property as essential, before they consider a mortgage for it. This is true in Slovakia, the Czech Republic, Turkey, the UK, Ireland – it is true everywhere.

Secondly, the property had been built on the flood plain of a major river. The flooding risk was serious enough for insurance companies to refuse to insure the property. With this bank, insurance would have been a condition for the funds to be released. So if insurance was impossible, the mortgage wouldn’t work either.

Lastly, the surveyor valued the property at much less than the agreed purchase price. He felt it was worth approx 60% of the price agreed. This meant that even if the bank had approved the mortgage, the maximum it could lend would have been 80% of valuation – which was 60% of the price. In effect, the client would only have been able to borrow 48% of the price. They would therefore have to increase their deposit from 20% to 52%, which meant they had to find significant extra cash. They had not budgeted for this.

We advised the client that any mortgage application would be refused, so they should not budget for a mortgage. It was their decision whether to proceed with the property and finance it differently. The client withdrew, but lost the deposit they had already paid.

Most clients contact their Mortgage Broker and their Lawyer, before they commit themselves to significant expenditure on a property. This is the best way to make things happen properly for you, with minimal financial risk.

In Slovakia, the banks advertise LTV’s for foreigners, which are slightly lower than in many other countries. However, there are often “special deals” which apply to particular developments, available from particular banks, and known to particular brokers. These usually have better terms and conditions – but the client would find it difficult to discover them without the help of a broker. These special deals can increase a publicly-advertised LTV of 60% or 70%, to 80% or 90%.

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Post Script

The above case studies were applications made to different banks in each case. All are good banks. So why are mortgage applications outside your own country sometimes more difficult than in your own country?

The answer lies partly in the numbers involved. Mortgages have existed in the UK for several generations, whereas they have existed in Turkey for 2 years. There is excellent land registry in Slovakia and the Czech Republic, covering all property. There is a very good land registry in the UK covering most property. There is much weaker formal registration of property in Turkey, where less than 50% of it is registered – so the bank may not be able to tell that the person selling an older property to you, has the right to do that. Is the property therefore adequate security for the loan? New property tends to be ok, but Turkish banks have evolved processes to cope with the registration uncertainty of older property and this has the effect of increasing the bureaucracy needed to get any mortgage.

There aren’t many mortgage applicants at all in many countries, because renting is more prevalent and society has a different attitude to debt and a different financial structure at this point. Of the mortgage applications received by Czech banks for example, 95% of them are from Czech people. Of the remainder, 3% are from Slovaks. About half of the last 2% are from German applicants. This leaves about 1% for the British, Irish, Other EU, American and all other nationalities. It is difficult for the bank to retain familiarity with underwriting issues, which arise so infrequently.

There is also a layer of extra underwriting issues which have to be applied because the applicant earns income in a different currency. For example, an allowance must be made for possible adverse currency exchange rate movements, which would have the effect of reducing the applicants ability to meet monthly repayments. This situation simply wouldn’t arise for a Slovak national in Slovakia, or a Czech national in the Czech Republic. However, it would be a worry for a bank which loaned its own currency to say, a British person who earned his income in GBP – against many currencies (in which the property price and the mortgage repayments are denominated), the British person’s apparent income would have reduced by 25% over the past 12 months

Imagine a large open-plan office in a Turkish bank, with perhaps 60 busy Turkish mortgage underwriters in it. They know what they are doing and they have a lot to get through. A few normal but hectic weeks pass, then someone shouts out (in Turkish of course) “I’ve got one of those weird Scottish ones here, who wants it?”. The answer of course, is that at the operational level they do not want it – because it is different and difficult to underwrite. The bank wants the business, but the operational work is best mitigated through the use of specialist brokers.