In recent years spiralling UK house prices and the strong pound have given homeowners equity to spend and the environment to make it go far in foreign climes. As such, investment in properties abroad has been a growing market. With air carriers continuing to battle on price, and today’s levels of communication making staying in contact for work or pleasure as easy from abroad as from the UK, there are few barriers to making the foreign property purchase that so many of us have dreamt about.
There are now a number of lenders in the UK that will supply finance for foreign properties including Norwich and Peterborough Building Society (N&P), Abbey National Offshore, and British Mortgages Abroad, a division of First National. Other lenders such as HBOS have subsidiaries like Banco Halifax Hispania set up to operate in foreign markets providing for both the local borrower and those domiciled in the UK. Operating out of Jersey, Royal Bank of Scotland International is another large operation offering borrowers finance for foreign properties among its banking services.
Joe Gomez, development manager for Spain at N&P, says business volumes have shot up since it started operating in Spain five years ago. Now he says it is averaging around four or five cases a week, and if the present economic conditions prevail in the UK he sees no reason why it should fall. In southern coastal Spain at least, the market is more dependent on the UK economy than that of Spain with over 40% of property buyers being British. The N&P operation has been so successful it is currently establishing finance lines for those wishing to purchase on the Costa Blanca, away from its heartland of the Costa Del Sol.
Gomez says: ‘I am speaking to six or seven intermediaries a day. Spring and autumn are the busiest times, but on average throughout the year we are doing four to five cases a week.’
For a borrower taking an N&P mortgage, Gomez says the turnaround times are more efficient than if they deal with a Spanish bank. He comments: ‘We can turn a case round quicker than the Spanish banks, which have no local underwriters and are still very bureaucratic. The valuations can also take time, but we have a surveyor from the Royal Institute of Chartered Surveyors’ based locally who can normally provide a valuation in two or three days.’ In total he says an application can normally be turned around in under 15 working days, where the norm for a local bank might be closer to one month. However, he says even this is a great improvement on a number of years ago when four to five months would have been closer to the norm.
At first Gomez says N&P did not deal with many intermediaries for Spanish lending and most of its business was referred from UK branches. However, the intermediary market has developed and there are now three models in use. Locally, there are a number of UK intermediaries operating on the Iberian peninsula, although they have not really managed to establish themselves as yet. More successful are the UK intermediaries that have developed a division in Spain, and those working solely from the UK but who organise finance for foreign purchases.
The mortgages available for foreign properties are not as varied as for UK property, and European lenders tend to base mortgages on affordability constraints, without considering rental income. Loan-to-values also tend to be lower, and mortgages are often arranged over shorter periods of time.
Miranda John, manager for intermediary PropertyFinance4Less says some of the criteria for Spain, Italy and Portugal are similar. She says: ‘Lenders assess eligibility for a loan on the applicant’s ability to service the loan and not the potential rental income from the property. The general guideline is that 35% of an applicant’s net income should cover existing outgoings and the monthly repayment on the loan. If you are self-employed income is assessed as the average of the last three years’ net income.’ As an example she says someone with a monthly income of £2,000, would have £700 to spend on existing outgoings and the repayments for the loan they are looking to obtain.
There is also a greater degree of tie-ins involved when buying a property on the continent, giving security to both the vendor and purchaser in the run up to the deal being signed. Using Italy as an example, John says: ‘Once a price has been agreed with the vendor both parties will sign a preliminary contract and make a deposit of 10%-30% of the purchase price, except in the case of new constructions where this deposit will be considerably less. The deposit is forfeited if the buyer does not proceed, and if the vendor withdraws then double the deposit is paid to the buyer by the vendor.’
In the main, buy-to-let mortgages are not available, although some lenders will turn a blind eye if owners lease their property out to help cover the cost of their investment. As Gomez comments: ‘We would not give permission to let properties [that we have lent on] but it does happen in the real world. We would turn a blind eye to it as long as a tenant is not being put in for the long term.’ He says the tenancy laws in Spain are different to those in the UK and something for investors to beware of. Someone who has been in a property for 12 months can acquire the legal right to stay possibly creating a nightmare scenario for unsuspecting owners.
Further afield, there is growing interest from UK purchasers in North America and South Africa. As in the case of Europe, local knowledge is essential if the pitfalls of local law and practise are to be avoided. In South Africa for example, John says properties are normally marketed at 10%-15% above what the seller expects to get. Non residents of South Africa can get a maximum of 50% loan-to-value and loans tend to be based on a 10-year term although this can go up to 20 years.
In the USA, Florida remains the most popular place of purchase for UK buyers and there is a greater degree of mortgages available although still nothing to rival those on offer for the UK market. John comments: ‘Mortgages can be arranged on a full-status and self-certification basis. All applicants must be 21 or over and should be homeowners in the UK. A deposit of 20% is required and the maximum term is 25 years. Loans can be denominated in GBP or USD. Mortgages are available as capital repayment and interest only. A strong credit history is essential and in most cases income multiples of 3.5 times income are offered. Verification of income will be required, but it may be possible to take into account potential rental income received from the property.’
As with buying on the UK, a large amount of research has to be put into surround issues such as add-on costs in terms of taxes and duties. In South Africa, the stamp duty will only amount to around 0.2% of the mortgage. However, legal fees tend to be slightly higher at between 1% and 2% of the property value, before transfer duty (between 5% and 8% of the property value), valuation costs and estate agency commission are taken into account. As a general rule, purchasers should look to have anything between 10% and 15% over and above the asking price to cover the surround costs involved. Although not always weighted or presented in the same way as they are in the UK, there are long term extras to be considered.
Assessing the impact that seasonal factors may have on a location is also an important factor of any decision. Too often this is not taken on board if people are in a holiday mood and looking at things in an optimistic light. Malcolm Corrigan, spokesman for Abbey National Offshore, says buyers have to consider the reality of buying a property to renovate for example. Do they really want to take up all their initial time with do-it-yourself and negotiating with tradesmen? Are they in a position to be able to go to their property at a moment’s notice to sort out problems as they arise? He also stresses that amenities such as hospitals, banks, and travel facilities should not be overlooked.
Although there are dangers in buying abroad, they can easily be negotiated with the right advice and careful planning. As travel, trade and communication barriers continue to fall, more and more lenders and intermediaries will begin to cater for the increasing needs of the UK buyer abroad.
Preparation is key to identifying the extra costs that are involved in any foreign purchase.
Money is likely to be needed up front for a deposit, so finances have to be in order as soon as possible
Buy-to-let mortgages are not officially available for foreign properties and local tenancy laws can be harsher than in the UK.