Most of us have been tempted, or even given serious consideration to buying a property overseas at one stage in our lives, and rightly so!
For some of us the temptation is just a passing fancy; but for an increasing number what can seem like a wild and exotic decision at first can be, provided you do your research thoroughly, rooted in good sense, and not nearly as hard to achieve as some people will try to convince you it is.
If you are committed, sensible, realistic about what is achievable and know who you are dealing with, you may be surprised by how straightforward it can be to acquire a wonderful property abroad using a mortgage product.
Knowledge is power!
As with most things, when it comes to overseas properties, knowledge is power! You’d be surprised how quickly you can turn yourself from an overseas property daydreamer into a subject matter expert.
In this post we are going to take a look at how to go about finding an overseas property mortgage that is affordable, risk-off and reliable. They do exist, but the process takes time, and dedication – don’t give anybody the time of day who says otherwise!
Many property owners, developers, and mortgage properties are actively looking for people just like you; responsible, savvy investors, who can make a good fist of owning and running an overseas property, make a positive impact on the local community, and by doing so, add value to the property whilst living the lifestyle they have always dreamt of experiencing. So without further ado, let’s begin.
Deposits & repayments tend to be higher than on your domestic property – but this can work both ways!
Let’s start with some basic truths. To acquire an overseas property, unless you are a cash buyer, you will need to obtain a mortgage. This means putting down a deposit, and that deposit will typically be more than you might expect to pay domestically – assume 30-40%. Additionally, you will be making regular mortgage payments, and the mortgage period on an overseas property will typically be shorter than what you might find domestically, which means bigger repayments.
But don’t despair. Both of these things can potentially work in your favour. Larger repayments plus a bigger deposit means that complete home ownership i.e. no mortgage left to pay, comes far sooner than it does domestically. Call it short term pain for long term gain.
- You will pay more on an overseas mortgage, and you will have to be able to prove you can make the repayments, but you will also clear the debt quicker.
Which Country (home or abroad) should I apply for my mortgage in (and what documentation will I need)?
This question represents your first big decision, or subject to research if you prefer. Many mortgage lenders in your country of origin may not wish to provide a mortgage in another country – not least because, if the worst happens and you cannot make the repayments, legally they would not be allowed to repossess a property abroad, which puts their investment at considerable risk.
Most big banks, however, have subsidiaries overseas which you may well be able to use. The reverse is also true; take Santander, for example, a popular mortgage provider in the UK, which is headquartered in Spain, a popular destination to buy overseas property. As a general rule of thumb, you can assume that banks won’t provide mortgages in countries where they do not have overseas branches.
Even if you do agree a deal with a bank based in your home country, the chances are you will end up dealing with the banks foreign arm in the country you are buying in, and you will need to open a bank account abroad – more information on that can be found here.
You can certainly expect that the checks that the mortgage provider will perform will be every bit as thorough as you would expect domestically, but this is a good thing!
The last thing you want is to enter into an arrangement you cannot afford, so before you begin to consult with any mortgage provider, why not do some of your own sums and read up on the subject – any mortgage provider will appreciate an applicant who has developed a solid understanding of the process, and especially one that has all the relevant documents to hand (plus a mortgage approval which we will come to later) when they are requested!
- Domestic banks don’t tend to provide mortgages on overseas properties – but they may have an international arm that does and are a good place to start your inquiries.
- You will most likely have to pay a larger deposit (30-40% is not uncommon) and make larger monthly mortgage repayments (a 20-year mortgage is typical and providers may insist that you are under the age of 75 when you make your final repayment) – but as long as you can afford it this can ultimately work in your favour.
- The mortgage provider should carry out stringent affordability tests to check you can meet the financial commitment (e.g. your outgoings less than 35% of your income). This is a good thing – don’t trust a provider that does not insist on strict checks.
- Checks will involve bank statements, pay slips, confirmation around all sources of income, financial commitments, debt, adverse court judgments – and you must supply paperwork promptly and accurately.
Which currency should I / will I pay my overseas property mortgage in?
This is another important question. If, as suggested above, you apply for a mortgage in the country you wish to buy your overseas property in, then you will almost certainly pay the mortgage (and the deposit) in that country’s currency.
This can work both ways financially. Obviously, there is some risk – exchange rates fluctuate against each other and that can have either a detrimental or positive effect on the size of your monthly repayments.
Say you have an overseas mortgage in euros, and the value of the euro increases sharply against the pound, then your monthly payments will increase significantly. You will need to think hard about worst-case scenarios, and whether you can afford to make your payments if the worst happens.
There are advantages too, however. If the euro, for example, slips against the pound, and you are based in the UK then your repayments will reduce. Plus, the interest rates offered by overseas mortgage lenders may well be lower than what you could find domestically, which means your mortgage repayments will pay off more capital and less interest – a good thing.
You will also have to consider how you will convert your income into the currency you are paying your overseas mortgage in. If you arrange a buy-to-let mortgage, it may be that your rental income is sufficient to cover both the mortgage repayments and the inevitable maintenance charges, refurbishments and extra costs looking after a property incurs.
Alternatively, you may wish to use an FX broker to arrange monthly transfers from your domestic income into the currency required for your overseas mortgage. They will be able to find you the best rates available and also advise when it might be possible to take advantage of favourable rates and convert a larger sum of money into the local currency. N.b always use an FX broker or money transfer broker if you can – they will give you a more favourable exchange rate and charge you significantly less fees than your high street bank.
- If you are looking to find an overseas mortgage to go with your overseas property, you will very likely pay the mortgage in the local currency.
- Since exchange rates can fluctuate considerably, you should consider worst-case scenarios and ask yourself if you could cope should an exchange rate turn against you (as had happened recently with the euro gaining considerable value against the pound post-Brexit, or with property buyers in Cyprus paying their mortgages in Swiss Francs).
- Consider how you are going to obtain the foreign currency to pay your mortgage – using an FX broker or money transfer agency is likely to be your best option – try using The Money Cloud’s FX rates comparison engine to help you find the broker that is right for you.
Am I buying an overseas property as an investment or as a home?
This will affect the type of mortgage you will apply for. Remember, when assessing your ability to meet mortgage repayments, the mortgage provider will not take into account rental you can earn on the property – they will insist that you prove you are capable of making mortgage repayments independently of what you might be able to earn by renting the property out.
So, in many ways it is best to put the prospect of financing the mortgage by letting out the property out of your mind altogether. Although the sums might work on paper it is risky and not a guaranteed source of income – it’s best to find an alternative way of funding the property.
If you are buying your property as a home then you can live in it, pay the mortgage and still benefit from any capital appreciation. Or, you may want to spend half the year in your overseas property, and half in the UK – if your job permits to do so, of course.
- Remember, you cannot obtain a mortgage on the strength of its buy-to-let value – you will have to prove you can finance the property using your current income.
Where should I start my search for an overseas mortgage (and can I obtain pre-approval on a mortgage)?
Why not start your search with your existing bank? They will already have a good understanding of your financial situation and therefore be in a position to judge whether it may be feasible for you to take out another mortgage.
That said, it may be your local bank is not a specialist, or does not have a presence in the country you are looking to purchase your overseas property in. If that’s the case, don’t despair, there are plenty of other banks that may want to lend to you. Perhaps there is a notable bank in the country you are buying in (in Spain, you could try Santander for example).
There are also many advisory firms that can help you find a mortgage as they are specialists and know the market inside out. Take your time choosing one and do a lot of research – some are better than others. Always remember: if it sounds too good to be true, then sadly, it probably is!
Now, to answer the second part of the question, yes you can obtain pre-approval on an overseas mortgage, and it is advisable to do so!
Having a pre-approved mortgage in place takes a huge weight off your mind – and the minds of the overseas property agents you are dealing with. It shows that you are on top of financial matters and are a serious potential buyer – it will impress an overseas property agent and will allow you to move fast should you find the right property.
Again, you can use a mortgage broker to help you complete the application for a mortgage pre-approval, or if you feel confident about your finances and what’s required you can try to obtain forms and fill them out yourself, and avoid some hefty and unnecessary fees in the process. Just make sure you don’t become overconfident and bite off more than you can chew, and make sure you are truthful – you will have to prove everything you say, after all.
If you need any help, we at The Money Cloud would be happy to advise you.
- Obtaining a mortgage pre-approval is a great idea – it will help you refine your search and be realistic about what you can afford.
- Take your time researching different overseas mortgage providers, don’t be afraid to ask questions, and hire a mortgage broker to help you if you want. Avoid paying out large sums of money right at the start of the process, however.
- Start your search for a mortgage provider with banks that you know and trust, and ask friends or work colleagues for contacts – or do some research online.
Final thoughts – and some must and must-not dos!
If you have always dreamt of or have recently become inspired to own a property abroad, there is nothing stopping you having a thorough look at what the options are.
There is no reason to dismiss the idea out of hand – if done correctly, owing a property abroad can be a smart lifestyle move that could also earn you a windfall a few years down the road. But it pays to be realistic from the outset – work out your budget, take advice, do some thorough research and keep your eyes and ears open for the latest trends.
Finally, let’s finish with (non-negotiable!) dos and don’ts.
- Do – expect to pay a higher deposit and higher monthly fees (on a shorter length mortgage) on a property overseas than you would expect to do domestically.
- Do – carry out a thorough assessment of what you may be able to afford before you start looking.
- Do – ask questions, carry out research, talk to people who have been through the process, and speak with and use advisors.
- Do – consider the implications of making regular mortgage payments in a foreign currency (use The Money Cloud’s comparison engine to search for the best rates and best brokers and money transfer agencies.
- Do – think about obtaining a mortgage pre-approval – so property agents know you are serious and so you can move quickly.
Now for the don’ts (read carefully!)
- Don’t – hand over large sums of money to advisors and agents before you have started to conduct your own feasibility studies.
- Don’t – believe the hype – make your own judgments, don’t be swayed by promises of high rental yields or unrealistic capital appreciation – and especially properties that have not even been built yet; remember – if it sounds too good to be true, it is!
- Don’t – make any payments to property agents unless you and your advisors are as confident as you can be that the deal is legally binding. Remember, foreign property agents are not authorised by the Financial Conduct Authority and therefore once you hand money over, you may never see it again!
- Don’t – think that you can obtain a mortgage on your overseas property by showing your estimated buy-to-let income. Even if this is what you end up doing, this is not an acceptable strategy in the eyes of a mortgage lender.
- Don’t – skimp on any aspect of the process – the more severe the means testing – the safer (and more potentially profitable) the investment.
- Don’t – let the whole process stress you out! If it becomes too much of a hassle, pull out. It doesn’t matter if you disappoint a seller or a mortgage broker – if the deal doesn’t look right, is not what you expected, or is causing too much stress, leave it! You can always come back to it in a coupe of years.
As we said at the beginning of this post, property ownership isn’t for everyone, but it could be for you. To find out, a little research and a few enquiries goes a long way.