Millions of Britons dream of owning a home abroad. But just how do you raise the money and what are the pitfalls along the way? Our guide to buying your foreign home answers your questions.
Finding a homeMany people spot something while they are on holiday. Otherwise, several magazines list foreign properties for sale, including Homes Overseas, Foreign Property News and Exchange & Mart. The internet is probably the best search tool at your disposal.
Raising the money
If you can buy with cash, do it. You will own the property outright without increasing your mortgage debt. This will mean fewer bills on your new property. If you don’t have the cash, there are two ways to pay for a foreign home. You can extend your main mortgage, or you can get a new mortgage for the property. Extending your mortgage is presently a cheap way of raising cash, but you may not be able to get a remortgage for more than 75% of the second property’s price. Remember, you risk losing both homes if you cannot keep up payments.
The other option is to take out a second mortgage on your holiday home. Several companies offer mortgages overseas, including Halifax, Abbey, which runs an overseas property service, Norwich & Peterborough building society and Barclays, which specialises in the French market.
You could also consider a mortgage in the local currency, but you need to be aware of all the risks. Taking out a foreign currency mortgage could be dangerous. The pound can move against the euro – if it weakens, your payments will increase. Properties generally have continued to rise in price this year (2004) as the pound has weakened against the euro. On the other hand if you are buying property in another country your home will be valued in that currency so it could make more sense to take out a mortgage in that currency. Abbey and Barclays both offer euro mortgages but the drawback is that you have to be paid in euros to be eligible.
Timescale
It depends on the country you are buying in. Buy property in France and it could take up to 20 weeks to complete the transaction. In Spain, Italy, Greece and Portugal it will average between 12 to 18 weeks. Be aware the longer it takes to complete the transaction the more at risk you are from rate fluctuations, which could add thousands to the real cost of the property in the time it takes to complete.
You can, however, protect yourself from currency fluctuations. One option is to arrange what is called a spot transaction. Basically an instant transaction, it allows you (the buyer) to transfer funds ‘on the spot’ to the agent or vendor abroad, in line with the exchange rate at that time.
You could also arrange a forward transaction. This is when you agree to fix the exchange rate at the current level for an agreed completion date up to 12 months in the future.
Halifax will arrange both forward and spot transactions to other banks for a charge. Transferrals to the Spanish arm of Halifax are free. Barclays will arrange forward transactions for existing customers, providing you meet certain conditions, again for a charge. Abbey National offers a telegraphic transfer service which takes between two to five days in Europe. There is a charge to send a sterling or foreign currency transfer.
Currencies Direct specialise in helping people who are buying property abroad and can offer spot and forward transactions where they fix a rate for up to two years. There is a flat fee and the exchange rate will also include a small weighting for profit but there are no charges on transfers over £5,000. Contact 020 7813 0332. Travelex has an information pack on how to carry out a spot or forward transaction up to 12 months in advance. Contact 0870 010 0095.
Language barriers
You will need a reputable solicitor and valuer who is local. Ask your bank or mortgage lender, they should be able to help you find these professionals who also speak English if you don’t speak the local language. The Federation of Overseas Property Developers, Agents and Consultants has a list of lawyers who specialise in buying abroad as does the Law Society. Beware that in some countries lawyers act for you and the seller, so make sure you’re getting independent advice. Talk to a British lawyer before you sign anything, and remember, you often cannot pull out of an agreed offer as you can in England and Wales.
• To help make life easier, This is Money has a free brochure service for properties abroad. Merely tick the relevant boxes in our brochure finder.
The costs
These will probably be more than you thought. Britain has some of the cheapest homebuying costs in Europe. For example, French legal fees are high – ranging between 10% and 15% of the house price. There is also a regional tax and an occupancy tax if you live there more than eight months a year.
In Spain, valuation will costs you, and loans must be signed by the public notary. Taxes and legal fees will normally amount to 8%-10% of the property value.
In Italy, costs are between 8% and 12%. In Bulgaria, which is growing in popularity with buyers, there is a notary tax and local taxes to pay, which may add a total 3% to the sale price. Solicitors can cost a further 3%, while setting up a company to make the purchase will cost £1,000 or more.
In Florida, you need to allow 4% of the price of your holiday home to cover stamp duty*, local taxes, legal fees and set-up costs.
In Cyrpus, you face stamp duty at the rate of 0.15% on £100,000 or less and then 0.2%. There is also a transfer fee of 5% on homes of £50,000 to £100,000 and then 8% after that. There is also an annual property tax of up to 3.5%.
The buying process is not the end of the expense. Check carefully what other local taxes you must pay, and be aware that in many blocks of flats you have to pay a service charge. You’ll need to open a local bank account, as services such as water and electricity may connect you only if you sign a direct debit. Local bills must be paid in local currency – this costs money to buy and in some cases foreign banks charge extra for transactions.
Tax implications
If you rent out your property abroad income will have to be declared to the British taxman. Check out the tax laws of the country you’re buying in. There may be implications if you rent or sell the house. Many countries have reciprocal tax agreements with the UK so that you don’t end up paying tax twice. You also need to make a will, as local inheritance tax laws may also come into play. For example, in France if there is no will a property cannot be passed solely to a spouse, but must be shared among any children.
You should also consider the extra insurance costs. There are a number of specialist insurers who cater for this. But you can also ask your own home insurer if they offer a deal to insure a property abroad.
The pitfalls
Don’t get carried away with the holiday atmosphere and think very carefully before committing. Most homes look nice in the warmth and sun. Make a return trip out of season to make sure you still like it and that there is the same level of local services – many resorts close up for the winter. If you are buying a ski chalet, check what happens once the ski season ends. Then ask yourself these questions:
• If you buy somewhere that needs renovation, do you really want to spend your holidays doing DIY or negotiating with local builders?
• If something goes wrong, can you drop everything to sort it out?
• Do you really want to go to the same place every year?
• Can you afford the expenses to get to your holiday home? Remember budget airline flights may not remain at rock bottom cost forever.
Property prices
Remember that, like in the UK, the value of your home may rise or fall. Britons have a peculiar obsession with property prices, and wrongly expect them to rise above inflation indefinitely. You might find your holiday home will not rise in value and could be difficult to sell. Always bear this in mind.
Source: ThisisMoney
