Overseas mortgages

Buying a property abroad is the dream of many people. But it can turn sour once they get into the intricacies of dealing with overseas banks, solicitors and developers. One area that has become more flexible, however, is arranging a mortgage overseas. Traditionally, most people buying abroad have paid with savings or released equity from their UK properties. But as property prices have soared in popular holiday destinations and foreign lenders have become increasingly accessible to UK buyers, more and more people are borrowing to finance homes abroad.

Where can you get an overseas mortgage?

In all the established overseas property markets – France, Spain, Italy, Portugal, Switzerland and the US – plus many of the newer developing markets such as Bulgaria, Greece, Poland, some parts of the Caribbean and even countries such as Israel. Newer markets will typically have higher rates, stricter borrowing terms and less choice of mortgage provider.

Are they very different to UK mortgages?

Not really. You are still taking out a loan secured against your property. But overseas lenders do work slightly differently. European lenders generally will not offer loans on an interest only or buy-to-let basis. They will usually base the amount you can borrow on your actual earnings, rather than any rent you may receive. Also, there is not really a market for self-certification mortgages in Europe. A wider range of loans is available in the US.

What’s the advantage of taking out a mortgage overseas?

Foreign lenders, particularly in established property markets such as France and Spain have become more flexible when lending to UK buyers. Also, interest rates in the eurozone are still often lower than UK rates. These low rates have attracted droves of buy-to-let investors, who have found opportunities increasingly hard to come by in the UK.

If you plan to rent out the property, that income can be offset against the loan for tax purposes. Also, some countries have punitive wealth charges but these are only payable on equity. Borrowing rather than buying outright could mean you avoid this tax.

Are there any disadvantages?

Borrowing in another currency adds another layer of risk. If the euro strengthens, for example, your monthly repayments would effectively cost you more in sterling. You can minimise this risk by using services provided by foreign currency specialists and banks to fix exchange rates and manage monthly transfers.

Who offers overseas mortgages?

Local lenders are increasingly catering for UK buyers, while some UK banks also operate in overseas markets. Abbey and Halifax provide mortgages on properties in Spain, while Barclays lends on properties in France, Spain, Italy and Portugal.

How would I go about arranging an overseas mortgage?

A mortgage broker can research the market for the best deal. Conti Financial Services is a specialist in the overseas market. Other brokers such as Savills advise on mortgages in different markets. Barclays last week launched an online service that gives tips to people buying abroad.

Otherwise you can go directly to a lender. This is probably easiest if you are using a UK bank but some overseas lenders are present in the UK. Credit Foncier, one of France’s leading mortgage banks, recently opened a branch in London to target people buying French properties. Piraeus Bank, a Greek lender, has also launched a mortgage service for British buyers looking for property in Greece.

Is it better to use a UK bank or a local lender?

It can be tempting to go for a name you recognise, and there are good reasons for doing so -– the language barrier should not be a problem if you are using a UK lender. Also, UK banks or those with strong ties to UK banks might be more likely to offer products such as interest-only deals, although the interest rates on these are likely to be higher.

Brokers say it is worth looking at local lenders too as they often offer the cheapest deals and a better range of fixed or variable rates. Larger lenders and those based in areas popular with UK buyers usually have English-speaking teams.

A local lender could be best if you are going for a specialised scheme such as sale and leaseback in France. Loans for this arrangement can be fairly specific to the country you are buying in so local lenders may have the best knowledge.

What sort of rates can I expect?

Rates can vary significantly depending on the country you are borrowing in. The cheapest are in the established eurozone countries. Rates in France, Spain, Italy and Portugal typically start at around 3.5 per cent. Rates in eastern European countries are usually higher: up to around 7 per cent in Bulgaria, 6 per cent in Turkey and 5 per cent in Cyprus and Greece.

What about the borrowing criteria?

These can be tougher than in the UK. Some lenders in overseas markets might lend up to 90 per cent of the property’s value but typically you should expect to borrow up to 70-80 per cent of the value.

What documentation do I need?

Usually lenders require proof of income such as a payslip or pension statement. You usually have to prove you can meet mortgage repayments through your own earnings rather than rental income.