It might not be the most exciting part of buying a holiday home in the sun, but the decision about how to finance an overseas property purchase is an important one. Sensible buyers – whether in the UK or abroad – know that before starting to sift through property details and viewing potential new homes, it is vital to get all your finances in order. Put bluntly, how will you find the cash?
Unless you are lucky enough to have the money sitting in the bank to buy your new purchase outright, you will need to borrow it. For most buyers, that comes down to a straightforward choice: should you get a local mortgage in the country where you are buying, or should you borrow in sterling from the UK, perhaps by releasing equity in your UK home and increasing your mortgage there?
In some countries, the decision is made for you. Until recently Thailand and Turkey simply did not permit foreigners to obtain a local mortgage. Even today, the number of financial institutions in both countries that will lend to you is very limited. In other countries, such as Bulgaria, interest rates have historically been high, so the decision to go elsewhere has been an easy one.
Once you have established how much you plan to spend – and remember to include taxes and buying costs in your calculations – deduct the size of the deposit you can stump up and you will know how much you need to borrow. Mortgage lenders in many countries demand a larger deposit than is usual in the UK, with some banks lending only 65% to 70% of the sale price. Lending terms are also often shorter than at home. In Dubai, it is not impossible to find someone willing to lend over 25 years, but 15 years is far more usual.
If you choose to obtain a mortgage abroad, be aware that choice differs substantially between countries. In Europe alone, there are major differences at the time of writing in 2007: Spain, Cyprus, Portugal and the UK offer mortgages in a variety of major currencies, while in Italy and France they are available only in euros. If you plan to rent your property out and earn income in a foreign currency, it makes sense to think about getting a mortgage in that same currency.
Many Western European countries tie their mortgage base rates to Euribor – Euro Interbank Offered Rate – the European equivalent of the Bank of England base rate. This has been good news for British buyers as Euribor rates have traditionally been low and stable. Buyers could save over 2%, for example, in parts of Europe at present (October 2007) compared with UK rates.
Set up costs, however, are higher and lenders abroad will rarely take into consideration potential rental returns when calculating your income.
The main drawback about borrowing in a foreign currency is the potential for exchange rates to move against you, causing chaos with even the most careful financial planning. No one has a crystal ball to foresee the future, so borrowers must plan for the worst. All overseas property buyers will have to open a current account in the local currency where they have bought to cover utility bills and local taxes and so currency risks of some sort are all part of buying abroad.
The second choice – and the most popular – is for buyers to release some of the equity in their homes in the UK. The property boom across Britain over the past two decades means many homeowners are sitting on large assets, so using this to fund another property makes sense. It is the quickest and often the easiest way to raise money and there are no long-term foreign exchange risks.
However, not only will you pay higher interest rates in the UK than in many countries, but you could also be in danger of rushing into a purchase without completing appropriate due diligence checks. Having to secure a mortgage overseas ensures that legal checks are made on the property title and that a valuation is taken.
A final word of advice: it is worth considering using an independent mortgage broker with good local knowledge who will be able to advise you on the available choices. Paying for this advice could save time and hassle and possibly end up saving money, too.
Cathy Hawker is a freelance property writer who contributes regularly to The Evening Standard and BBC Good Homes Magazine.
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