Mortgages: an overview of what can you borrow, where, for how much?

Thursday, June 26, 2014

Mortgages:  an overview of what can you borrow, where, for how much?



Excellent buying conditions are luring Britons back into overseas property, with bargain prices and a stronger pound making it more affordable than ever. Our record levels of website traffic offers hard evidence that many prospective buyers who have been sitting on their hands for years are deciding to go for it whilst property prices are still low and the pound is trading at an 18-month high. That's all very well, of course, if you're a cash buyer. But how easy is it to obtain finance for your overseas property purchase?

Quite understandably, as with UK mortgage providers - overseas lenders have become stricter about to whom they lend to since the global downturn and they're now judging each case on its own merits including what and where you want to buy. Just as the UK market introduced more stringent affordability criteria on 26 April, margins have tightened up abroad. But something positive too: the European Central Bank (ECB) in June cut its main interest rate to a record low of 0.15 per cent - down from 0.25 per cent. This should lead to reduced borrowing costs across the eurozone, report Conti, along with the further weakening of the euro currency: a double dose of good news for UK buyers. Plus it still is very possible to obtain finance, especially if you have a healthy deposit to put down and can demonstrate that you have a sound financial profile.

"Lenders will generally require more details about your income and outgoings now, so it's important to have your accounts in good order," says Clare Nessling, Director at Conti, the overseas mortgage specialist (mortgagesoverseas.com). "They'll also use the debt-to-income ratio, which establishes whether you can afford to maintain the mortgage repayments, so it's important to prepare all your paperwork in advance. If you intend to finance your overseas property purchase with a mortgage, the sooner you get the ball rolling the better, even before you've started looking at homes." As with any aspect of buying a property abroad you mustn't let your heart rule your head. You need to give yourself time to research the mortgage market, so that you can find the best possible deals and decide on things like whether a foreign currency or sterling mortgage will be most suitable.

Arranging the financial side of things upfront is fundamentally important. Securing a mortgage is no longer such a given, and it can vary according to the time of the month or year, suggests mortgage advisor Kevin Sewell (internationalmortgages.org), who has seen an increase in family members clubbing together to get a mortgage as lending criteria have tightened up - with the average property purchase sales price of €150-250k. "Obtaining a mortgage can be a bit hit-and-miss these days, depending on a bank's cash reserves. If a particular bank has used up their pot of mortgage money for the year, you won't get one," he says, adding that this is especially pertinent in Greece. Thus it's vital that you determine how much you can spend at the outset, adds Ms Nessling.

"An 'Approval in Principle' (AIP), will do just that - it will tell you exactly how much you can borrow and what price range you can realistically consider. Any seller, given a choice, will prefer a purchaser who can demonstrate that they have their finance in place, and having an AIP could make you better placed to negotiate price. It's tangible evidence that you can take along when house hunting and it can also lead to your application being fast tracked once you've chosen your dream home. And it costs nothing."

It's really important not to get carried away with property you can't afford, and you must also therefore take into account the associated costs of buying a property abroad before you go house hunting. You should add at least 10 per cent of the asking price to cover things like taxes, insurance, and fees - although it can be more than this in countries such as Spain and Italy. The application process for an overseas mortgage can take anything from six weeks to several months - another reason to start the ball rolling as early as possible. It takes time to get all the necessary documents together, and you must be prepared for some strict deadlines attached to the mortgage and general property purchase.

Using a broker

It's crucial that the right advice is sought and that you don't try to cut corners when borrowing abroad. The overseas mortgage market is totally different to the UK market, and now, more than ever before - as you'll see from the dedicated sections later in this article - each country presents myriad national and local laws, customs, foreign exchange requirements and language barriers. A specialist broker can hold your hand throughout the whole process, advising you on the most favourable lending rates in the country of interest, and negotiating competitive loan-to-value schemes over timescales to suit you.

A broker might offer mortgages for several countries - like Conti and International Private Finance - and can ensure that you are put in touch with specialists in the country in question, to enable then to comply fully with planning and legal conditions and assist with currency exchange. Alternatively, they might just specialise in one country - as per Athena Advisors (France), Caixa (Portugal) or Mustafa Yilmaz (Turkey) - see the country-specific sections.

Currency issues

There has been a well-publicised case of British buyers in Cyprus being badly advised and having taken Swiss Franc mortgages - with disastrous results. "We always recommend that an overseas mortgage and the income used to service the mortgage repayments are in the same currency, thus avoiding exchange rate issues," adds Ms Nessling. "Plus if you have plans to pay off your mortgage early, you should check what the redemption penalties are on any mortgage deals on offer, particularly fixed rates. "So, for example, if you're planning to rent out your French property through a local agent, the euro income can be used to service the monthly euro mortgage payments, thus avoiding any fluctuations in currency."

Conti's top tips when taking out an overseas mortgage

Obtain an approval in principle

This will confirm you can obtain the necessary funds before signing any dotted line and prove to sellers that you're a serious buyer. You'll also be better placed to negotiate price. It's tangible evidence that you can take along when house hunting and it can also lead to your mortgage application being fast tracked once you've chosen your property.

Consider exchange rate fluctuations

Even small changes in exchange rates can make a big difference to the purchase price of your overseas property, your monthly mortgage payments or future rental income. Consider the benefits of financing your property with a mortgage secured in the local currency - e.g. if you're planning to rent out your French property through a local agent, the euro income can pay the mortgage payments without any fluctuations in currency.

Borrow in the local currency

We generally recommend that an overseas mortgage and the income used to service the mortgage repayments are in the same currency, thus avoiding exchange rate issues.

Manage your accounts

In many countries, in order to receive your overseas mortgage, you'll need to open a local bank account, from which your mortgage payments can be debited. Set up standing orders in your local bank account to meet local bills and taxes. Failure to pay your taxes in some countries such as France, Portugal and Spain, could lead to action by the authorities.

Valuation

Before proceeding with the purchase (especially with a re-sale property, regardless of age), ensure an independent valuation of the property is carried out, which should point out any problems with the property - e.g. subsidence, damp, wiring defects - and could also highlight any possible boundary disputes. One of the biggest advantages of taking out an overseas mortgage is that the lender will do its own checks on the property, ensuring that a proper legal title exists, that the property is registered in the buyer's name and that a valuation of the property takes place.

This article first appeared in the Summer 2014 issue of A Place in the Sun magazine.

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A Place In The Sun