Financing a property overseas - easy if you know how! - 22nd May 2007

With the summer holiday season at its height, more and more UK nationals are drawn towards owning a piece of the sun, not for just two weeks, but year round. The boom in buying a property overseas shows no sign of slowing, and according to a recent report by the Institute for Public Policy Research (IPPR), published in December 2006, there are now approximately 6 million British nationals now living full or part time overseas.

Although for many people, living abroad is the realisation of a dream or the path to a better quality of life, obtaining an overseas property and any subsequent move needs careful consideration before the dotted line is signed. All too frequent are media reports of how people get carried away, only to get burned when they discover their new home has no legal title, or it was built illegally without the proper permissions, most notably recently experienced with the much publicised issues in Marbella.

It is vital to do homework, research the area thoroughly and most importantly, seek specialist advice from independent solicitors, architects and surveyors, before taking the next step in deciding how to finance the property.

Financing overseas properties
There’s no right or wrong approach to this, and really depends on the buyer’s personal circumstances, but in many cases, a loan taken out on the property in the destination country, is the preferred route. Although an outright cash purchase means no outstanding debts, a major advantage to arranging an overseas mortgage is that the lender will arrange for a valuation, thus preventing any possible overpricing, and will check out the property, ensuring proper legal title exists and that other issues such as proper planning permissions and building licences are correct.

As the UK banking system is not geared up to lend on overseas properties, a locally based lender will be required, along with lawyers, solicitors and possibly architects. The buyer might at this point decide that money can be saved by ‘going it alone’, which is possible, but fraught with difficulties, for example undertaking transactions in a foreign language.

Increasingly, people are deciding that the safest option is to leave the hard work to independent overseas mortgage brokers, such as Conti Financial Services Ltd. Simon Conn, MD of Conti says, “There are numerous risks attached to buying properties abroad, and still there are an alarming number of people who commit large sums of money without undertaking the necessary checks. The mortgage process is simply not the same as in the UK, but people still let their hearts rule their heads when finding their dream property – and often this recklessness hits their pockets – and hard.”

Mortgages abroad
Overseas mortgage brokers are continually increasing the scope of loans offered as the market expands, both in the variety of mortgages and the countries in which they are offered. However, there are commonalities which apply to any loans offered, for example, most mortgages are calculated and offered on an affordability basis. This involves the lender taking into account income and existing liabilities, including any current mortgage or rental payments, loans, credit card payments and any other outgoings, such as maintenance payments. It should be noted that in many countries, any proposed rental income from the property will not be taken into account, as this cannot be guaranteed.

If France is taken as an example, mortgage payments must not exceed 33% of gross monthly income, so if the income is say £2,500, 33% times that figure is £825, minus existing a monthly mortgage payment £300 with no other liabilities would leave a balance of £525 for the proposed French mortgage payment.

For European properties, the majority of buyers take out Euro mortgages as opposed to Sterling loans, as simply European interest rates are lower. If taking out a Euro mortgage, the monthly repayments must be made in Euros. This may present currency fluctuations throughout the term of the loan, which can, and most likely will, result in higher monthly payments than initially anticipated, but only in some months over the repayment term.

There are ways of assessing whether or not it is advantageous to take a foreign currency mortgage and people should ask themselves what is it that they intend to do with the property before deciding on a particular mortgage.

If the intention is to rent out the property through an agent, the rental income will be in Euros. Therefore, it makes sense to take out a Euro mortgage as it has a lower rate than the Sterling option, where this option exists. It also means the rent received can be held in a local bank account to service the mortgage repayments, thus avoiding the fluctuation in currency when transferring Euros to the UK each month.

If the property is to be used solely for personal use, then a Sterling mortgage may provide a stable solution where available, as there are no potential currency fluctuations incurred each month. However, this must be weighed up with the higher mortgage interest rate.

Whatever the route taken to obtain the overseas dream, the message remains the same – do the homework and essentially, take independent advice.

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