Why would I want an overseas mortgage?

What is an Overseas Mortgage and why would I want one? - 8th January 2007

One of the first considerations for anyone buying a property overseas is how they are going to finance the purchase. There are generally two options here, either raise capital on existing property in the UK by means of an additional or new mortgage (providing there is sufficient equity), or alternatively take out an overseas mortgage secured on the property abroad.

Releasing cash from the equity of a UK property may help secure the overseas property quickly, let’s face it, who doesn’t like to be paid in cash? But being a cash buyer does present some risks, especially if specialist, independent legal advice isn’t sought, for example, issues may arise over problems with title to the property if this has not been competently and thoroughly investigated.

As the overseas lending market has developed and become more competitive over the past 20 years or so, people are increasingly taking out an overseas mortgage to finance the purchase of their property using a bank or financial organisation in their country of choice. In many cases, this means achieving a better interest rate than raising money on a property in the UK. However, the biggest advantage to choosing this route is that the lender, similar to lenders in the UK, will do its own checks on the property, ensuring a proper legal title exists, that the property is registered in the buyer’s name and that a valuation of the property takes place to check other issues such as proper planning permissions or building licences etc. are correct.

Taking out a mortgage with an overseas lender is also relatively straightforward, especially if you use an overseas mortgage specialist. They will have familiarity and understanding of the lenders and will know of any restrictions and administration requirements, which can save the buyer a lot of time, cost and hassle when arranging a mortgage.

The types of mortgages available from overseas lenders are similar to those offered by UK banks. There are a variety of interest rates available and these rates can be fixed or variable. The interest rate payable for each mortgage is usually driven by how much of a loan is required compared to the value of the property. This is referred to as the ‘Loan to Value’ (LTV). Generally speaking, the bigger the deposit a buyer has to put down on a property means they will have access to more competitive mortgage deals.

There are certain countries in Europe where either a Sterling or Euro mortgage can be secured on the property. For example, in Spain, property buyers can arrange a mortgage in Euros, Sterling and all major currencies. In Italy and France, Euro mortgages are currently available in certain areas.

There are advantages in taking out a Euro mortgage - the most obvious being that it is cheaper than a sterling mortgage. European interest rates are lower, and since the introduction of the Euro, interest rates have remained relatively low and stable.

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

Using Spain as an example, if the intention is to rent out the property through an agent in Spain, 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. It also means the rent received can be held in a Spanish bank account to service the monthly 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 perhaps a Sterling mortgage may provide a stable solution, as there is no potential currency fluctuations incurred each month. However, this must be weighed up with the mortgage interest rate. Currently, the interest rate for a Sterling mortgage in Spain is approximately of 6.75%, compared with rates from 4.5% for a Euro mortgage.

Establishing eligibility for a mortgage secured on an overseas property varies from country to country but generally speaking the maximum loan permitted is based on an affordability basis and is usually a percentage of the applicants’ joint take home pay (net) less any outgoings such as rent, mortgage, credit card, loan, maintenance repayments etc. Taking Italy as an example, all existing liabilities together with the proposed Italian mortgage payments must not exceed 30% of net monthly income.

Example:
Using a joint monthly income of £2,500 - 30% equates to £750 minus existing monthly mortgage payment £ 300 – assuming no other liabilities. This leaves a balance of £450 for a proposed Italian mortgage payment, which would effectively fund a mortgage in the region of €80,000 over 25 years.