Borrow for a second place in the sun

Borrow for a second place in the sun

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From Bordeaux to Barcelona and Budapest to Bulgaria, British holidaymakers in their thousands are falling for foreign second homes.

Buying abroad has gained momentum in recent years, as homeowners dream of retiring in the sun or investing in countries with profit potential. An estimated 250,000 Britons own a property outside the UK.

But while finding the right property at the right price might be relatively easy, how should you pay for it? Many people simply tap into savings or remortgage their first home and pay cash up front. This is by far the cheapest and simplest method if you have equity in your current home in Britain, as long as you bear in mind currency conversion costs. Since large deposits are often required on purchases – sometimes up to 40 per cent – buyers could remortgage to pay this and then take out a loan for the balance.

But if you want to take out a mortgage in the country where you are buying, how do you go about it? Several UK lenders provide loans on overseas properties through their international divisions. They include Halifax, HSBC, Lloyds TSB, Royal Bank of Scotland, Woolwich, and building societies Leeds and Norwich and Peterborough.

Some of these lend only in sterling, while others will lend in the currency of the country if you prefer. Most specialise in key eurozone countries such as France and Spain.

Conti Financial Services, a specialist adviser on arranging foreign mortgages, tells borrowers to take out a mortgage in the currency in which they earn their main income. Simon Conn, managing director, says: ‘Most clients should borrow in the currency they are earning, but those who buy properties in popular countries like Spain and Portugal and then rent them out tend to arrange their mortgage in euros. This is so they can offset their euro rental income against the loan repayments.’

A further attraction of euro loans especially is that they are significantly cheaper than sterling deals. Conn says: ‘Interest rates are typically 2.5 percentage points less at the moment.’

Among the deals available through Conti, borrowers can get a euro loan for as low as 3.4 per cent in Portugal, although this is for higher values of loan and there are redemption penalties attached.

But Conn warns borrowers who take a foreign currency mortgage to consider how currency fluctuations can affect their repayments. He says: ‘Exchange rate movements may increase the sterling equivalent of your liability under a foreign currency mortgage.’

Other details to ponder include the minimum purchase amounts – €100,000 in Spain, for example – and how lenders determine how much you can borrow. Most lenders in popular destinations consider affordability based on a set calculation. In Spain they will take your net income, calculate 35 per cent of this, deduct other liabilities such as your UK mortgage repayments, then use what is left to calculate what you can borrow. The self-employed are likely to face more stringent calculations.

Borrowers are also likely to face tighter limits on the maximum loan to value. In France, the cap might be as low as 60 per cent (although it can go as high as 80 per cent), and if the home is uninhabitable and needs renovation the terms will be even tighter.

Unlike in the UK, if you are purchasing a buy-to-let property in France lenders will ignore the rental income when considering your application and expect your own income to cover repayments. You will also need life insurance to back a loan, although sometimes this is included in the deal for a first-time borrower.

In Portugal you will find that the loan will be agreed on the valuation price and not the purchase price. Conti warns borrowers to check all the extra costs involved, as lenders charge arrangement fees. A French lender probably will not arrange surveys, unlike in the UK, and you should think about organising one yourself.

Ray Boulger of London-based mortgage broker Charcol, which deals with both Conti and expatriate finance specialist Blevins Franks when clients want to buy abroad, warns of other pitfalls. ‘The legal arrangements are very different and then there is the language issue. Never sign a contract that you do not understand. Buyers who are in the position to buy with cash should also take care not to rush in and save on legal costs simply because they are not using a mortgage. They should get a local solicitor and arrange a survey. It may cost money but it will be worth it. They need to be sure they have legal ownership of the property and that the properties have been built legally. Another issue in Spain is that you can buy a property with someone else’s debt on it – check this carefully.’

Source: The Observer