Funding Overseas Property
Funding is of vital importance for many overseas property buyers and selecting the right form of finance, be it a mortgage, equity release scheme, an alternative arrangement or a combination of these, will require solid research to find the best option to suit your needs.
Until recently, many countries did not offer mortgages to overseas buyers. But with the increase of worldwide real estate investment, many governments have decided to lend to foreign buyers in a bid to boost economic growth.
The UK offers a well developed mortgage system to fund your property in the UK or overseas; however, tighter lending conditions everywhere sometimes make it potentially more difficult to secure the loan you hope for. Now, more than ever, it is essential to find a good independent mortgage advisor who will shop around to help you obtain the appropriate funding. We would advise you to employ an independent mortgage advisor who will recommend products from the entire lending market, not simply from the lenders they work for.
Many buyers consult financial advisers and mortgage brokers who will scour the market for them and find out which mortgage is the most appropriate for your needs. They will carefully take into account your financial circumstances, plans, attitude to risk and other preferences. Other buyers arrange their mortgages direct, via the phone or even on the internet.
How do I know if a mortgage advisor is professional?
A mortgage broker who is competent, professional and trustworthy is a must and you are well advised to obtain a recommendation from an independent party, such your lawyer or a friend who has a track record with the company. Watch out for:
- The one-man-band, unable to show you proof of qualifications or professional indemnity. Mortgage brokers need to be regulated by an organisation comparable to the British FSA. With horror stories about fraudulent paperwork and hidden charges around, you should double and triple check the broker's credentials before entering into business with him/her.
- Some estate agents' preferred mortgage advisors will often be far from independent, being funded or partly owned by the real estate company itself. Some agents don't care if the broker behaves unethically as they simply wish to sell the property and pocket the commission.
- Broker fees are normally standard in the country concerned (e.g. in Spain, 1% fee to the purchaser and a further 1% to the broker from the bank - therefore a hefty fee for a few days' work). This sometimes makes the odd oversight a tempting proposition to some unscrupulous brokers).
Mortgages
Where shall I apply for a mortgage for my overseas property?
Mortgages can sometimes be obtained in the UK for the purchase of property abroad and the list of countries for which this service is offered is increasing fast; however, many buyers find that a bank located in their country of purchase may offer them a better deal. Be aware that interest rates on overseas mortgages are sometimes higher than in the UK and are often variable. Some may purely offer repayment mortgages, while others will be more flexible and offer other products such as interest-only funding.
Some countries, such as Croatia and Thailand, do not yet offer mortgages to foreign nationals at all. In familiar territories such as France or Spain, branches of well-known European high street banks can be found such as Halifax, Abbey National or Deutsche Bank, but wondering down the high street in Eastern Block countries or further afield, you will have difficulty in finding lenders, so a home-based mortgage may be your best option. If you use a subsidiary of a UK lender abroad, you may find similar deals available to those in the UK.
What are the banks' requirements?
Generally speaking, in order to qualify for a mortgage, your outgoings, including foreign mortgage repayments, must not exceed 40% of your net income. However, if you are a first time buyer, lending criteria have become very stringent and it is now getting harder and harder to get onto the first rung of the property ladder.
Documents normally required worldwide will be:
- Application form
- Passport
- If you are employed:
- copies of your last three months pay slips
- copies of your last 5 years P60/employer's reference
- copies of your last 6 months personal bank statements
- If you are self-employed:
- copies of your last 5 years audited accounts
- copies of last 12 months' business accounts
- last 6 months' personal bank statements
What types of mortgage are available in the UK?
Variable rate mortgages - the interest rate you pay can vary over time. Every mortgage lender has a Standard Variable Rate (SVR) that is loosely based on rate established by the Bank of England (Bank Rate). Each lender's SVR is usually 1% - 2% above the Bank Rate.
Fixed rate mortgages - as the name suggests, they allow you to fix the rate of interest you will pay on your mortgage for an agreed period. Most UK mortgage lenders offer a range of fixed rate mortgages. The most popular fixed rate mortgages are 2 year, 3 year and 5 year deals, but it's possible to get a fixed rate mortgage for anything from 6 months to 25 years.
As a general rule, the longer the period of your fixed rate, the higher the interest rate you can expect to pay. However, as this market is so competitive, 2, 3 and 5 year deals are sometimes available at very similar interest rates, so it pays to shop around.
Capped rate mortgages - a mortgage similar to a fixed rate mortgage, in that there is a maximum interest rate set for a given period of time, and the rate you pay is guaranteed not to go above that rate for the agreed period. However, with a capped rate mortgage, should the Bank Rate fall during that period, the rate you pay for your mortgage will 'track' the interest rate downwards, reducing your mortgage repayments.
Tracker mortgages - these are similar to discount rate mortgages, but are arguably more transparent. With a discount mortgage, the lender offers you a set percentage from its own Standard Variable Rate (SVR). A tracker mortgage follows the Bank Rate set by the Bank of England charged at a defined margin, eg. if the Bank of England sets the Bank Rate at 5%, you might get a tracker mortgage at Bank Rate 1% = 6%.
Buy-to-Let mortgages - buying property to rent out privately is a hugely popular form of property investment. Buy-to-let mortgages can make sound investments, often allowing you to cover the full cost of your mortgage with renters' money.
Be aware that if you are a first time buyer with no proven record of paying a mortgage and wish to raise a buy-to-let mortgage, lenders will apply rigorous checks to be sure that you can afford the repayments and that the property is a good long-term rental opportunity (10-15 years). They often impose age restrictions, larger deposits (15-25%) and minimum income requirements, as well as slightly higher interest rates and arrangement fees. As a result, many people, worried about whether their children will ever be able reach the first step of the property ladder, are investing in buy-to-let property as a long term solution. It is also possible for first-time buyers to take out buy-to-let mortgages while they are renting themselves.
Assuming you are eligible for the buy-to-let mortgage, research is vital as you will need to ascertain what buy-to-let mortgage types are best for you and what kind of renters to look for to suit your chosen rental property. You will also need to look into the country's tax laws in relation to the profits you make from your buy-to-let property as you'll almost always be liable for tax on rental income.
Useful websites:
The Association of Residential Letting Agents
Association of Landlords
Council of Mortgage Lenders
Remortgages - remortgage simply means switching your mortgage deal and/or mortgage lender. Remortgages are very popular, and with good reason: whether you are switching your deal for a better remortgage rate, more suitable conditions, better service or increasing the size of your home loan, there are plenty of deals for remortgages available.
What are the costs?
The fees associated with taking out and paying off a mortgage have more than tripled in the last decade and you will need to watch out for the hidden charges behind the cheap headline rates. When examining the bank's lending terms, you will need to be vigilant about obtaining a clear quotation from the start. In the past, lenders charged a fee to cover administration costs, but today, many rely on increased fees to bring in extra revenue.
Life cover: many UK and overseas lenders will insist on your obtaining life insurance cover before allowing the loan to proceed. It is important to arrange this prior to going ahead with the purchase as if it is not activated on the date of completion, the bank will not release the funds for the purchase to go ahead.
What is Approval in Principle?
This is highly recommendable step to take, prior to an inspection visit overseas as you can pre-qualify for your mortgage, thereby saving a potentially wasted inspection trip. You will need to provide full information on your finances and the bank will then advise you on the likelihood of your obtaining finance.
Having found your dream property, you will want to waste no time in reserving it before someone else beats you to it. Approval in principle saves time as the bank already has some of your financial details on file. You will need to fill in a full application to transform your approval in principle into formal approval should you wish to go ahead and proceed with the purchase. In some cases buyers can obtain formal approval from the start, a particularly useful option for off-plan buyers who will need to commit to purchase in the form of a deposit, well before applying for a mortgage.
In the case of financing a resale property purchase, it is also a good idea to obtain an Agreement in Principle for your mortgage before signing any preliminary contract or paying your deposit. Ensure that there is an opt-out clause in the contract to allow for the event that a loan cannot be finally agreed.
Should I opt for off-plan finance from the developers?
Many off-plan developments offer installment plans over between 12 to 60 months as part of the off-plan deal. The charges applicable vary according to the developers and repayments are usually indexed.
You are not obliged to take the developer's option, although you will probably save some arrangement costs if you do so. It is always wise to exercise caution and obtain competitive quotes from other mortgage suppliers before simply taking the developer´s option.
What are shared investments?
Quite simply this means buying with a relative, friend or group of friends. This is often an effective way of affording a property as it reduces the amount of cash investment required by each party.
Warning!
When investing with others there may be disagreements and disputes. Therefore it's important to make an initial contract between your fellow buyers, detailing the amounts invested, the percentage returns each person is eligible to and the mechanism of agreeing decisions. This is particularly important when parties have invested different amounts or when there is an even number of investors, as this could lead to split decisions.
Equity Release
Thousands of people are asset rich but cash poor, particularly in today's economic situation. If you have a substantial amount of money tied up in your main asset, you could always release it by selling up and buying a smaller home; however, many older people would rather not sell the family home.
Equity release can be arranged either through a re-mortgage (because there is an existing mortgage in place) or a new mortgage (on a debt free property), then using the cash released to finance the new investment.
Do I quality for Equity Release?
Increasing numbers of older/retired people are turning to equity release mortgages to allow them to free up some of the value in their properties. Currently around 40 products exist from some 20 providers. While their requirements differ slightly, you will normally need to satisfy the following criteria:
Aged a least 55, depending on the scheme you choose, and no older than 95 Own a freehold property outright (valued at least £30,000 - £50,000) that is in good repair Wish to raise at least £25,000 to £30,000 The property will have to be free of tenants, being your home for as long as you are able to live there
The formula to calculate the equity is very simple:
Current value of property - current loan commitment = accumulated equity
Case Study
The buyer invests 80% of the 175,000 EUR equity available = 140,000 EUR for further investment.
A property was purchased 10 years ago at a value of 100,000 EUR with a mortgage of 60,000 EUR Today the property is valued at 225,000 EUR and the existing mortgage is now 50,000 EUR Therefore the accumulated equity has become 225,000 EUR - 50,000 EUR = 175,000 EUR There is potentially 175,000 EUR available to use for the purchase of another property or properties
If you are in the right circumstances, with plenty of equity in your property and few outgoings, equity release could lead to a better and more fulfilling lifestyle during your retirement years.
Many buyers have purchased abroad over the past few years and have discovered that the value of their properties over time has increased significantly, potentially allowing equity to be released. This is ideal when considering their next investment, however be aware that equity release is a product available only in the more sophisticated financial markets; therefore, you may not be able to release as much from the property, as easily as you hope.
Warning!
Before going ahead with an equity release plan, you will need to be fully aware of the potentially high cost of your chosen scheme. These are permanent arrangements and can potentially take away all the assets you have accrued in a lifetime.
Pension Schemes
Some pensions allow for the purchase of residential property abroad but not all pension providers are likely to allow you to use them - the assistance of a specialist pension fund manager will be invaluable to arranging finance through a scheme.
Pension schemes are strictly controlled by law and taxation regulations, which differ between countries. However investing in a buy-to-let property through a pension can be
Company Purchases
Some overseas buyers will have their own company and may consider using the company for the purchase of an investment. This can make a great deal of sense if set up correctly as an investment company, however the investments will all become commercial assets of the company and careful tax planning is required to ensure there is no double taxation incurred when trying to extract profits from the company.
If you have a trading company, you may legally use your company to invest in a property. This often appears attractive as the company may be able to raise funds more freely than an individual, but with this comes many tax issues that could affect the profitability of the trading element of the company, exposing your asset to risk from normal trading creditors. Many buyers therefore avoid this mechanism if an alternative means of finance is available.
Cash
This is an obvious, simple way of financing an overseas property purchase if you already have the funds. In general terms, however, it is far better not to use your own funds when the bank's is available instead. The reason for this is simply because by investing only a small amount into perhaps more than one property and financing the remainder by debt, you can enjoy greater profits, while benefiting from a larger amount of disposable income if you require it along the way.