Buying a Property Abroad: Overseas Mortgage Guide for UK Buyers

Overseas Mortgage Guide

How to Buy a Property Abroad: Read our Complete Guide

Whether it’s a quaint cottage in the Algarve or a high-rise apartment in Barcelona – owning a property abroad is an exciting prospect. However, if you are looking to make the purchase with a secured mortgage, the process can be significantly more complex than it would be here in the UK. There are a number of aspects – as well as potential risks, that you must first consider prior to starting the process. In our Complete Guide to Mortgages & Buying Overseas, we are going to provide you with all of the necessary information that we think you should consider.

To begin, we’ll take a look at the fundamentals – such as how obtaining a mortgage abroad works and whether or not you are likely to succeed. After that, we’ll then discuss some really important factors such as exchange rates, taxation and even Brexit. We will also cover some of the crucial underlying regulations that you need to look out for with respect to the country you plan to invest in.

Ultimately, by the end of reading our guide in its entirety – you will have a comprehensive understanding of what obtaining a mortgage for an overseas property entails. Let’s start by finding out how a foreign mortgage works.

How do I get a mortgage for an Overseas property?

Before getting started, you will need to have a think about where you plan to obtain a mortgage from. Essentially, there are three main options available to you. This includes getting a mortgage from a UK lender, a foreign lender or alternatively – you might be able to remortgage your current UK property. Let’s explore these options in more detail.



UK lender

Some UK banks will allow you to obtain a mortgage for an overseas property purchase through their international mortgage service. In most cases, UK lenders will only facilitate this in countries where they have a presence. This means that you have a better chance of utilizing the services of a major bank as they will most likely have branches in multiple jurisdictions. You will also have a greater chance of success if opting for a popular EU holiday destination such as Spain or Italy. On the other hand, less common destinations further afield might be more difficult. Nevertheless, if you do decide to obtain an overseas mortgage from a UK financial institution, once approved you will more than likely deal directly with the branch located in the country you are purchasing the property.

Overseas lender

A second option available to you is to obtain a mortgage from a lender located in the country you want to buy the property. In most cases you will need to arrange this through a specialist broker that has a relationship with a range of estate agents and lawyers in your country of choice. If you are looking to purchase a property within the EU, some nations have significantly lower interest rates in comparison to the UK. As a result, there is a good chance you might get a more favourable deal.

An important consideration that you should factor in is that mortgages obtained with an overseas lender are no covered by the Financial Conduit Authority. As a result, if the lender gave you false or misleading advice during the application process, you would not be able to obtain any compensation. Although we will cover this in more detail further down, you also need to consider the possibility of your monthly repayments fluctuating in response to ever-changing exchange rates.

Remortgaging your current property

An additional option available to you in your quest for an overseas property is to remortgage your current home. Not only will this allow you to deal with a UK based provider, but you can also take full advantage of any equity surplus attributable to rising property prices. For example, if you originally took out a £150,000 mortgage and have thus far paid off £50,000 – that would mean your equity stands at £50,000. However, if the property now had a market value of £250,000, then your equity would in fact amount to £150,000.



Remortgage Guide

 

So now that you know the three main options available to you, in the next part of our guide we are going to discuss how much you are likely to obtain.

How much can I borrow from an overseas lender?

There is no hard and fast rule as to how much you can borrow from an overseas lender as it ultimately depends on the country, as well as the lender in question. Much like in the UK, you will be expected to provide the lender with a minimum deposit amount, proportionate to the value of the property. In most cases, the value of the deposit demanded by overseas lenders is substantially higher than the UK.

Again, this differs on a country-by-country basis – however you won’t get anything like the 5% minimum available under the UK governments Help to Buy Scheme.  A common ratio that lenders like to use is the RTV (Rate-To-Value), which takes in to account the amount of equity you have against the amount you need to borrow.

To give you a general idea as to what to expect, we’ve detailed some of the most popular countries below, along with their respective averages.

Spain

Spain is one of the most popular holiday destinations for Brits and as a result, it is no surprise that the amount of properties being purchased by UK nationals is on the rise. In most cases, mortgages are available up to 70% of the Loan-to-Value (LTV) ratio, meaning that you will need to put down a deposit of at least 30%.

Italy

Obtaining a mortgage from a lender in Italy is slightly harder than Spain, as most institutions require foreign nationals to deposit at least 40%, meaning that the LTV ratio stands at 60%.

France

If the availability of a hefty deposit does not meet your current financial circumstances, France might be a better option. It is now possible to obtain a mortgage as a foreign buyer with just a 15-20% deposit, meaning you have a chance of success with an RTV ratio of 80-85%.

The USA

If you are considering buying a property across the pond, USA lenders generally cap the RTV ratio to 70%, meaning you will need to contribute a deposit of at least 30%. This can vary from state-to-state, but even more importantly – as a non-EU national you will need to consider a plethora of other factors, such as residency. We’ll cover this in a bit more detail further down.

Once again, each nation has their own average RTV ratios and it can also vary from lender-to-lender, so the above averages are indicative at best.

How much will an overseas property mortgage cost?

Once again, there is no one size fits all when it comes to fees. It all depends on the lender and the respective country they are operating in. It will also depend on what kind of plan you decide to opt for. For example, whilst a fixed rate plan will give you peace of mind – at least in terms of the fixed monthly repayments (not taking in to account fluctuating exchange rates), you might be losing out on ultra-cheap interest rates.

This is certainly true within the Eurozone – whereby the European Central Bank (ECB) have been lowering interest rates since the financial crisis begun in 2008. In fact, at the time of writing in September 2018, interest rates still remain at 0%. This allows European lenders to obtain cheap finance, which subsequently allows them offer more favourable rates.



On the other hand, if opting for a variable rate, although you are accustomed to lower monthly repayments, you also face the risk of having your rates increased as and when the lender decides. This can be detrimental if you do not have enough spare capital to cover the increase, especially when you take exchange rates in to account.

Nevertheless, to give you a general idea – the Telegraph claim that average fixed rates charged by France and Spain are 3-4% and 3% respectively. Ultimately, to get a better understanding of what rates you are likely to pay, you will need to make some enquiries with lenders based in the country you want to buy the property in.

With respect to choosing the right deal, it might be wise to employ the services of a qualified broker.

Important factors to consider

If you have your eyes set on your dream home and think that it is well within the realms of your current financial situation, it is imperative that you consider some of the below factors before getting the ball rolling.

Brexit

In June 2016, on the back of a national referendum – the UK voted to leave the EU. As a result, Terrassa May triggered Article 50 the following March, meaning that the UK will leave in March 2019. The problem that we currently face is uncertainty. An affirmative deal is yet to be made, meaning that we still don’t know what relationship the UK is likely to have with our European counterparts.

First and foremost, we are led to believe that there is likely to be a transitional period that in effect, will result in a business as usual approach. However, we are yet to ascertain how this will affect bi-lateral relations, at least in terms of owning a property.

Under the current law, EU nationals can not only live and work in all 28 member states, they can also purchase and own property. It is well worth obtaining independent legal advice from a broker that has expertise in obtaining a property overseas and most importantly, ensure that you keep yourself abreast of any developments that arise from the ongoing negations.

Furthermore, to give you an idea of the preferential treatment that is afforded to fellow EU citizens, if obtaining a mortgage from a lender based in France you are able to do so with a deposit as little as 15-20%. However, that rate spirals up to 50% if the applicant is a non-EU citizen.

Exchange rates

When going through the overseas mortgage process, fluctuating exchange rates are often overlooked. In reality, there is no way to avoid this. However, certain nations are going to be more susceptible to larger fluctuations than others. For example, if your monthly mortgage repayments are settled in a major currency such as USD, EUR or CHF, then exchange rate movements are likely to be less volatile.

However, this isn’t always the case – especially when one looks at what happened to the Pound after Brexit. In fact, in less than 24 hours after the result was announced, the Pound lost 10% and 7% to the USD and EUR respectively.

If at the time you had a mortgage agreement with a foreign lender, then your monthly repayments would have increased significantly. This is because when you take out a mortgage with a financial institution located overseas you most commonly repay the money in the local currency that the lender uses.

One such safeguard that is well worth considering is using a foreign currency broker, who are able to lock in a rate for a certain amount of time. Some companies even allow you to lock in a rate for up to 18 months, which will avoid the unpredictability of fluctuating exchange rate movements.

A decline in the real estate industry

In response to the financial crisis of 2008, one of the worst affected industries was the real estate sector. As a result, house prices went on a rapid run of decline. In the 16 months between October 2007 and February 2009, the average UK house lost 20% of its value. However, as you will see from graph below – prices quickly recovered in 2013 and once again, they are increasing year-on-year.

UK House Price Index

As the UK housing market is one of the strongest real estate sectors in the world, Brits weren’t hit as badly as our European neighbours. To give you an idea of how destructive the crash was for certain nations, in Spain – house prices fell by an average of 40% between 2007 and 2013, with Portugal not far behind at 30%.

As a result, if you were in receipt of a mortgage prior to this collapse, there is a good chance that you would have been in severe negative equity. This is where the value of your outstanding mortgage is higher than the current market value of your house. Therefore, you are effectively paying the lender more money back than the asset is actually worth.

Regulation and legalities

Although British citizens are able to own property in all 28 member states, the underlying regulations can differ between nations. Well before finalizing your mortgage application and subsequent purchase, it is imperative that you seek legal advice pertaining to any local laws that might affect you.

For example, if you were to purchase a property that has been erected on to a plot of land that should have been reserved for agricultural land, then you might run in to some serious problems.

You will more than likely be signing documents in a foreign language, so an English speaking legal practitioner will able to securitize paperwork such as property surveying, permits, contracts and deeds.

They will also be able to advise you on any taxation obligations that your purchase will be accustomed too. It is always best to employ a lawyer that has no relationship with the estate agent you are buying from, as it will ensure you receive independent and impartial advice.

Obtaining a mortgage overseas – The verdict?

Purchasing a property overseas can turn a dream in to a reality. However, to avoid a potential nightmare – there are a plethora of factors you need to first consider. If you have read our guide from start to finish, we hope you now have a firm understanding of the importance of getting everything right.

This begins at the initial stage of choosing a mortgage provider, along with any applicable deposits that you will need to put down to secure the property. Upon finalizing the financial and legal proceedings, you also need to think hard about specificities such as exchange rate fluctuations, falling property prices and of course – what effect Brexit will have on your ability to make the purchase.

Ultimately, it is well worth contacting a qualified broker that specializes in overseas property purchases. Although it might cost you a little bit extra, it will ensure that you do not make any pivotal mistakes.

Kane Pepi

Kane holds a Bachelor's Degree in Accounting and Finance, a Master's Degree in Financial Investigation and he is currently engaged in a Doctorate - researching financial crime in the virtual economy. With a keen passion for research, he currently writes for a variety of publications within the Financial and Cryptocurrency industries.


kane@moneycheck.com
https://www.linkedin.com/in/kane-pepi-63b5a0146/

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