The days of finding an exceptionally cheap foreign home are probably at an end, but this has not put off the thousands of British citizens that invest in an overseas property every year. The second homes market is booming along the Iberian coast and there are even anecdotal tales of the British in France gazumping each other in the search for the perfect holiday home.
First National Bank’s foreign lending arm, British Mortgages Abroad (BMA), lends in Florida in the US. According to Gerry Bell, marketing manager at BMA, the reason behind the growing market is prevailing low returns on investments.
He says: ‘More people are getting low returns on other forms of investment and are considering a buy-to-let mortgage or perhaps a property abroad which they can enjoy, and with euro or sterling mortgages people are realising it is not that difficult to buy overseas.
‘The tie-in is with the rise of buy-to-let mortgages here in the UK. Five years ago, you would never have thought so many people would have a second property due to the risks involved in letting. In the same way people are buying holiday homes and off-setting some of the costs by renting.’
Intermediaries with a client looking to mortgage a property abroad will find the range of products far more limited than in the domestic market. The British lenders in this market, such as Abbey National Offshore, British Mortgages Abroad, Norwich & Peterborough and Barclays ‘ to name a few ‘ will have a small range of fixed rates, trackers and discounts.
Repayment mortgages seem to be the norm. Malcolm Corrigan, external communications manager at Abbey National Offshore, says: ‘We have a reasonable range of mortgages, but people still tend to go for straight repayment.’
Bell adds: ‘I think many lenders try to select what they consider to be the most popular and appropriate product for that market and keep it simple. Lending abroad is a relatively new market, so lenders start with quite a small range.’
It is hard not to draw the conclusion that the small number of lenders based in this country has led to little competition and therefore low levels of innovation.
Bell says: ‘If we were to get a strong band of customers saying they wanted something different, or there was feedback from intermediaries saying there was demand, then I think lenders would react to that.’
One facet of lending on foreign property that prospective clients may be unaware of, is the relatively low loan to value (LTV) rates available.
In Spain clients would need a minimum of 25% as a deposit, in France maximum loan to values are around 80% to 85%, depending on the client. This can be problematic, especially when the other costs of buying abroad are taken into account. In France, legal fees and taxes are high and buyers are advised to budget for at least 15% of the property price.
The currency the loan is provided in can also affect the LTV. Corrigan says: ‘At Abbey National Offshore we lend in sterling up to 80% LTV, whereas for a euro mortgage we would only lend up to 70%. In Spain, Portugal and the islands, mortgages are normally available up to 75% LTV, but at around 60% for the euro mortgage.’
LTV aside, there is little agreement as to whether it is better to borrow in the home or local currency ‘ or deciding whether it is of any concern to clients.
Kevin Sewell, proprietor of brokers Kevin Sewell International Mortgages, says: ‘When it comes to currency risk I supply people with the information, explain it to them and let them make their own choice. Nobody normally talks about currency fluctuation as a factor in the decision to buy or not. Those that do never end up buying. People buy abroad because they want to be there and by the time they come to me they tend to be quite switched on about these matters.’
Bell, on the other hand, thinks the lending currency makes a difference. He says: ‘There is a logic that says if you are paid in sterling, to avoid currency fluctuations, that is what the mortgage should be in. However, currency risk will always be a factor. There is always a point where one currency is changed to another, and you must be committed to that.’
BMA takes on some of this risk by offering a lock on the exchange rate for 21 days between the offer and completion. This helps make it easier to define the initial costs.
Down to the individual
Corrigan says the decision ultimately depends on the individual: ‘Whether someone should take out a euro or sterling mortgage depends on individual circumstances and whether they live abroad permanently, or whether it is just a holiday home. If they are retired and live with day-to-day expenses in euros, then they would want a euro mortgage. There are also a lot of potential expatriates that may not retire for several years and think in sterling and are employed in sterling. They should go for a sterling mortgage. That said, these are generalisations and no two cases are the same.’
There is even the option of borrowing in a third currency. Sewell says: ‘In France there are just euro mortgages apart from one or two sterling mortgages at the more expensive end of the market. However, I do work for a lot of expatriates who are paid in dollars, so I can arrange dollar mortgages in Spain or Cyprus. It depends on the individual client’s situation, but 95% of those we arrange for take out a euro mortgage.’
It is worth noting that Sewell does not tend to use British lenders because ‘ as with many domestic intermediaries ‘ his clients do not typically meet mainstream UK lenders’ criteria, due to factors such as self-employment.
There is an alternative funding method becoming more popular in the UK. Remortgaging the customer’s main residence is in many cases now possible.
Corrigan says: ‘With the increase in property values in this country, we have seen an increase in remortgaging as a means of financing property abroad over the last 18 months.’
An advantage of this method is that the remortgage company does not necessarily have to be a specialist in overseas lending. Once the equity in the primary home is released the client is free to spend it as they wish.
A common scenario for this method of financing foreign property is a couple in their 50s whose children have left home, they both have an income and equity in their main home ‘ but have not had time to save a deposit.
In this scenario Sewell advises: ‘We might remortgage to raise a deposit and get the rest of the financing abroad, or organise a fifty-fifty arrangement. Some people completely remortgage in the home country and go abroad as a cash buyer ‘ with the strength of the pound at the moment this can prove advantageous.’
Remortgaging a UK property would mean the property with a first charge on it would be in this country, while the reason for raising the loan, and the added risk would be in another.
Bell says: ‘The view we take, using Florida as an example, is that there is a choice. Either remortgage the UK property taking equity and become a cash buyer in the US, or get a sterling mortgage here for the foreign property. The added advantage is that, instead of using the UK home as security, we will allow the client to opt to use the Florida home as security. Many people want to keep a safe base here in the UK.’
The largest hindrance to brokers entering this market is the amount of specialist knowledge required to aid a client wanting to buy property abroad. Although many processes seem similar to those in the UK, the exact procedure does vary from country to country, and can be complicated by a foreign language.
There are also many additional costs which need to be anticipated such as money transfer deductions, service charges for any shared amenities, fees for translating documents, lawyers’ charges, travel expenses, insurance and taxes. In some countries, such as Portugal and Spain for example, failure to pay taxes can result in the seizure of the home.
Yet there are a number of options available to brokers faced with clients wanting to purchase second homes. While arranging loans with foreign lenders might be the preserve of specialist intermediaries, many UK lenders with overseas operations are quite prepared to deal with brokers, and to give them as much guidance and support as they can.
Paul Robertson is a staff writer
Whether clients should borrow in sterling, euro or any other currency will depend on their own circumstances.
Borrowers buying overseas will usually need a higher deposit than if they are buying in the UK.
It is possible to finance overseas property through remortgaging or equity release.