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How to … Finance your property abroad

Dec 25th, 2008 | By | Category: Property of the Month

To own a home overseas is rather special, but to make it all possible you need to sort out the best way to finance the purchase.

The simplest option is to pay cash and if you can do that, fine. Otherwise, you can consider re-mortgaging by tapping into the equity of your UK home. This raises the amount of mortgage debt, but you can normally get particularly good deals in this country, and you do not need to worry about ongoing currency fluctuations with your mortgage payments. However, you can only borrow up to a certain percentage of the value of you main home. Depending on the lender, it gets trickier to raise above 75% of the property’s value.

Taking out a second mortgage

So another possibility is to take out a second mortgage on your new home. Some well-known names operate in this market, including Barclays, Abbey, and Norwich & Peterborough. Financial advisers can also help. One established operator in overseas homes is East Sussex-based Conti Financial Services, which has a useful website containing details of the different types of mortgage available in countries all around the world www.mortgagesoverseas.com.

Unlike the highly sophisticated UK market, you may be limited to repayment mortgages which pay off the loan and the interest as you go along. The term may also be shorter, and the chances are that you will have to put down a good sized deposit. Self certification and buy-to-let are also not possible finance options in most countries. In France and Portugal, loans are calculated on joint net/’take home’ pay, minus all existing outgoings such as any rent or mortgage payments, loans, maintenance payments and your new mortgage payments. And these liabilities must not exceed 40% of your net monthly income.

Arrange to pay mortgage repayments in your own currency

Generally, it makes sense to arrange your mortgage in the currency that you earn your income in. This way, your mortgage payments will not rise or fall depending on the day-to-day exchange rate of pounds sterling and the foreign currency. An exception would be if you received rental income in the local currency that you could then use to pay the mortgage. You may also be able to offset rental income against interest-only payments for tax purposes.

An important point to remember is that if you are arranging finance on the property do ensure that this is stated in any contract because you then have the opportunity to opt out if the loan is not agreed. This will allow for the full return of the deposit. In any case, always give yourself a cooling-off period before signing up the initial contract and putting down the deposit. It is easy to get carried away in a beautiful location, but you need to treat the exercise very much as you would for the purchase of a UK property.

Make sure to get a survey and appoint an English-speaking lawyer

Many people who purchase abroad do not bother with a survey or to appoint English-speaking solicitors, and with only the sales pitch from the estate agent to go on it is not surprising some come unstuck. For example, you do not want to find out that you have inherited a debt, which can happen in some countries such as Italy and Spain.

Take out currency insurance and do not overstretch your finances

It can take a while for a sale to complete, so do take out currency ‘insurance’ so that your dream home is not suddenly costing more when you sign on the dotted line purely due to exchange rate fluctuations. This may seem a little daunting, but most of the big banks and plenty of specialist brokers offer this service, which takes the form of forward transactions. You arrange to buy an amount of euros or US dollars that you can convert to, from pounds sterling, at any point in, say, the subsequent four months. The cost will be minimal when set against what you could lose if the currency was to go against you.

Never overstretch your finances. The whole point of a home overseas is to derive pleasure from it. So do add up all the costs involved, such as lawyers’ fees, local taxes, and maintenance costs. Whatever you do, do not rely on rental income to cover all your outgoings, because agents have a habit of being over-optimistic about the returns you can achieve.

You could spread the financial burden by teaming up with family or friends to buy somewhere more impressive, but with a smaller cost to you.

With your eyes wide open to the financial issues you can clear the way for full enjoyment of your home overseas.

Posted by Mark Battersby – Ample
Ample – http://www.iii.co.uk

Last Updated ( Saturday, 20 January 2007 )

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