If you are thinking of purchasing a property abroad and require a mortgage, there are a number of aspects that need to be taken into account.
There are also added advantages of utilising the services of an independent bank – rather than one connected to the developer or selling agent - as they will check the legalities and carry out a valuation of the property, although they will not carry out a full in-depth survey unless requested.
A lender will also ensure the property is good security for the mortgage that you require and to check the property has not been overpriced.
However, when applying for a mortgage abroad there are many different underwriting obstacles you may come up against, according to Simon Conn, the UK’s leading overseas property professional and financial advisor (www.simonconn.com). Below are some common issues.
Lenders tend to calculate how much an applicant can afford by only taking into account 30-35% of their total net personal income (after tax), to cover any existing liabilities plus the cost of the new monthly mortgage repayments. Liabilities include existing mortgages, bank and car loans, school fees, maintenance and alimony payments and credit card balances, which need to be cleared, even if it is a 0% interest deal.
Net income is normally calculated from employed, pension or, possibly, investment income. In most instances, rental income on the new property will not be taken into account as part of the calculation.
If an applicant has existing rentals, lenders may not take that income into account. However, if that rental income is from multiple properties and separate audited accounts are available, the net profit from that source may be taken into account. They are then likely to request a tax return to substantiate this additional income.
A lower loan-to-value or a higher deposit will not affect the maximum amount you can borrow, as, since the world economic crisis, it is primarily down to affordability, but you may benefit with enhanced lending terms – ie lower interest rates, reduced setting up costs etc.
If you are employed, it is ideal if you have been employed in that current job for at least 6-12 months. If it is shorter, a potential lender will need to know of any remaining probationary period, and you are likely to be asked for your latest CV showing your job experience/history.
If there is a bonus, overtime or commission to be included, it is only likely to be included if it is guaranteed, or proof of a long-term track record is available.
If you are self-employed, you will ideally have at least three years’ trading history with a minimum of two years’ profitable accounts (confirming both gross turnover and net profit for those years). There must be a full explanation for any drop in turnover/profit and, of course, any losses incurred.
Please note, if an applicant has more than 20-25% shareholding, then they are normally deemed by a potential lender to be self-employed. If the self-employed applicant is based outside of the UK, their accounts must ideally be prepared by a recognised international firm of accountants to be accepted by a potential lender.
However, if a loan or other expense is paid for by a business, then any of these costs may not affect a personal mortgage application. In this case, you must show at least 3-6 months’ history of the business account paying these expenses, but if you have any defaults, missed payments or CCJs, you are not likely to be accepted.
The maximum age a mortgage can finish differs from country to country, and this ranges from age 65 to 75. However, the majority of lenders will ask for any proof of income to be received after the normal state retirement age.
Please note, that by applying for a mortgage, it could slow down the sales process and it could be beneficial to apply for an “Agreement in Principle (AIP)” before finding a property, should the lender offer this option. With an AIP in place, it could be advantageous when negotiating with a seller.
There may also be additional bank, local taxes and legal costs applicable to the cost of raising a mortgage.
How much can I borrow?
Overseas banks generally promote repayment mortgages rather than interest only. The information below - as at January 2018 - is a general guide to what is available in some of the current most popular countries. These are available on a case-by-case basis and are subject to a client’s overall financial profile and property valuation.
Portugal has always been a popular country with Brits looking to buy abroad, with many recognising its good value for money, nice weather and ambience when compared to other Mediterranean countries. It is not as stiflingly hot as some places as it is mostly on the Atlantic coast rather than the Med and there is also the Golden Visa programme and other tax benefits which are available to retired people.
Mortgages are available up to 80% loan-to-value, although better lending terms are available for loans of 70% or less. The most popular areas include the Algarve and the Silver Coast north of Lisbon, but there has been more interest for Madeira and even the odd enquiry for The Azores. Interest rates are currently available from approximately 1.75%-2.00% above 12-month EURIBOR (the interest rate at which some European banks lend funds to one another, where the loans have a maturity of 12 months).
Spain continues to be popular with its great weather, Mediterranean coast and laid-back lifestyle, whilst holiday home and investment purchases seem to be increasing. Mortgages are available up to 70% loan-to-value (better lending terms are available for loans of 60% or less). Interest rates are currently available from approximately 1.50%-2.00% above 12-month EURIBOR.
As usual, France remains in the list of top countries. Transport links from the UK are excellent so it is easy to get to, and it offers a more relaxed lifestyle with fewer people and better weather. Mortgages are available up to 80%-85% loan-to-value (better lending terms are available for loans of 70% or less). Interest rates are currently available from approximately 1.50%-2.00% above 12-month EURIBOR.
Certain areas are still of interest – such as Umbria & Tuscany, whilst Puglia and Sardinia are becoming more popular. Mortgages are available up to 60% loan-to-value and lender underwriting can be more onerous than other European countries. Interest rates are currently available from approximately 1.50%-2.50% above 12-month EURIBOR.
Interest in the USA has waned a bit since the Brexit vote and the exchange rate between the US dollar and the pound has led to a reduction in the number of potential purchasers. Popular areas include Boston, Fort Lauderdale, Miami, Orlando, Tampa, New York and other parts of the East Coast. West Coast destinations are always of interest, including San Francisco, Los Angeles and Seattle. Maximum loan-to-value rates are 70% (up to 75% in Florida) and interest rates are from approximately 4.50% fixed for 3 years, or 4.875% fixed for 5 years.
Agents 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. This income received could come from rental received from the new property.
In the past buyers have come unstuck by being misadvised to take out mortgages on, for example, Cypriot properties with a Swiss franc mortgage, but then exchange rates swung disastrously against them.
Win on exchange rates
When buying property in another currency, exchange rate fluctuations will affect the purchase price and mortgage payments. Foreign currency exchange companies are usually a better option, according to Meyrick Green, an Account Manager at currency specialist Moneycorp (www.moneycorp.com).
“A specialist can provide guidance and support so that you then understand fluctuations in the market and what they mean for you. Together with rates that are often much more favourable to those offered by high street banks, this could save you a lot of money on your deposit payment,” he said.
Some currency firms also offer the opportunity to lock in exchange rates up to 18 months in advance. “The exchange rates are always changing, and that can make the cost of your foreign mortgage payments unpredictable. We have tools that can fix regular payments in a simple, cost-effective way,” Meyrick added. This suits those who like to take control of their budget as it offers protection from currency fluctuations.
Ask questions about where a property has been built. For example, if it has been built on an area that should have been set aside for green belt or agricultural land, then the chances are there is a risk. Make sure you take advice from an independent, English speaking lawyer - preferably not from the same area as the property.
In some cases, there can be problems with properties that have been constructed with the wrong permits, granted as a result of corruption, or with no permits at all. An independent lawyer should be able to save you the heartache of seeing your newly purchased dream home demolished.
Consider planning permission and which licences the property needs. Not having the correct licences could have an impact on what utilities you can obtain.
Poor construction is a common problem. Always obtain an independent valuation, ideally from a professional surveyor expert in that country, even if it is a new property, as this will highlight any problems. New properties can sometimes be built in poor soil and with insufficient foundations, substandard building materials, or in dubious locations such as floodplains.
One of the most important warnings when purchasing abroad is when it comes to contracts. It is common to only receive one contract in the local language, in which case, you must get a professional translation completed. If you are given two copies of a contract which include the original and a supposed translation, get the translation checked by a professional.
If you are buying a property to rent out make sure you check what licenses are needed in the area as you may not even be allowed to rent your property out. Also, consider the cost of maintaining the property. Decide if it is worth employing a managing agent to look after it for you but do not forget to factor in their costs as it will reduce your profit.
How often do you intend to visit the property yourself to ensure it is kept up to date? If it is a long-term let, think about the wear and tear on furniture and other fixed goods.
Distance away – if the property is a long way from your main home, you may need to get there to sort out any major problems.
Who is going to vet your tenants? If they damage your property, you must have suitable cover and a deposit in place.
“Re-locating overseas permanently or just buying a holiday home abroad does not need to be a headache. Go through the proper channels and take advice from an independent lawyer and surveyor and your dream could be turned into a reality,” Simon Conn said.