Overseas Property Finance Guide
This section is split into information on how to finance the purchase of an overseas property through a mortgage (either from within the UK or overseas) and issues relating to the purchase of foreign currency. The majority of this information is general in nature and should provide a good starting point for those unfamiliar with finance.
For country specific finance guides please click here.
Mortgages
There can be numerous benefits to obtaining a mortgage or re-mortgage in order to finance the purchase of your overseas property. This is also referred to as 'gearing up' your money and is great way to increase your buying power. When buying property for investment purposes, financing the purchase can be particularly attractive as it may allow you to achieve a much higher return on investment.
If you are interested in gearing your capital (and have a budget of around £400,000 +) then you may be interested in our Investor Services Division.
Can I afford to repay a mortgage?
You should make sure that you can afford to repay any loan you take out, remembering that on top of these repayments you will also have the initial purchase and furnishing costs (please see our section on furnishing overseas property), ongoing costs and taxes. You should try and avoid being totally reliant on forecast rental income in order to repay a mortgage. Even in the most flourishing market always be as conservative as possible. Between 4-8 weeks is a sensible forecast in an emerging market (you may of course achieve far higher occupancy levels than this).
If you are relying on a loan to finance your purchase be sure to obtain an agreement in principle prior to parting with a deposit. Off-plan properties always require an initial deposit followed by staged payments throughout the build process. A mortgage broker may provide this service for you at no extra cost.
Is a mortgage the right thing for you?
The first thing to establish is whether or not obtaining finance is an appropriate course of action for you? Are there any reasons why you might not be able to obtain finance or would prefer not to have to service a monthly debt? There are advantages to making a cash purchase as you don't have to worry about any outstanding debts. This might be an attractive option where the property is intended to be a permanent base (and is common in retirement circumstances, i.e. you might have a large amount of equity in a UK property which is released to fund the overseas purchase - please see our section on Retiring Overseas). However, this still leaves a lot of money tied up in a relatively illiquid asset.
If you do decide to go for a mortgage, you will have to make a decision as to whether you opt for sterling or foreign currency. UK banks will not lend directly on overseas properties, because other countries' property purchase systems are outside their sphere of influence and understanding. The relative merits of borrowing in a foreign currency or releasing equity in the UK very much depends on where the property is situated and an assessment of your personal circumstances. Should you wish to remortgage your property in the UK please feel free to contact us for advice. We have an experienced in-house mortgage broker who has spent the last 10 years specializing in the finance of buy to let property in the UK.
Borrowing in Foreign Currency?
You can either contact a local bank directly or use a UK-based overseas mortgage broker who will arrange an overseas mortgage for you, usually with a local bank. In practical terms the broker is a very useful source of information and can talk you through the entire process, in addition to liaising with the bank and other relevant parties. If this is your first purchase and you are unfamiliar with the process we would strongly recommend using a well respected UK broker such as Conti Financial Services, or BulgarianHomeLoans.com (for Bulgarian Loans, obviously!). This will save you a great deal of time in terms of correct filing of documents and will provide a useful sounding board for peace of mind. Brokers will typically charge (dependant on the location and mortgage product) up to 1% brokerage fee, despite the fact that they generally get paid commission by the bank as well.
Which is better, foreign currency or sterling?
Foreign set-up costs are likely to be more than remortgaging in the UK though the interest rates in the UK may be much higher than many other countries (Cyprus and Spain to name but a few). Look at where you are purchasing first, after which we will be happy to discuss various options with you.
Foreign currency mortgages are generally less generous than UK ones. Typically you will need a deposit of at least 20% (normally 30%), and the repayment period is usually 15-20 years, rather than 25 years +. Most mortgages are repayment loans, and significantly, calculated on an affordability basis. In many European countries only a third of your disposable income may be taken up by debt, so the bank will work out the maximum you can afford per month given your incomings and outgoings, and work backwards from that point to produce a loan sum.
It is therefore common for UK buyers to raise maybe a 30% deposit by extending their UK mortgage and then take a 70% foreign currency mortgage to capitalise on relatively low interest rates there.
So, as you can see you need to assess your personal situation and look at the location in which you are intending to purchase.
'Click here for an example of how one of our clients financed the purchase of their villa in Cyprus last year' Currency
When considering the merits of borrowing in a foreign country you must also consider the issue of fluctuations in Currency and how that will affect your mortgage repayments. The currency risk can be significant but it reduces if you are receiving rental or other income in that currency. For instance, if you bought in Europe using a local euro mortgage and rented out to European tenants in Euro's, then the property might be self-financing in Euro's, with no need for sterling input.
However, where you need to make monthly payments from sterling into another currency you can actually fix a rate with a currency house for up to 24 months so you will know exactly how much money is being debited from your UK account regardless of what happens to the currency. Please see below for services offered by a currency house or check out our Purchase Example referred to above to see how using a currency house works practically.
Services Offered by Currency Houses
Spot Trades
A spot trade is where you buy currency at the prevailing exchange rate and pay for it straight away (typically for a deposit payment or for the entire purchase if you have full funds available). Forward Currency Contracts
A Forward contract is where you fix the exchange rate now for a specific date in the future (up to 2 years ahead). In layman's terms you are buying now, paying later. To lock yourself into a guaranteed exchange rate private clients will have to pay for at least 10% of the value straight away (a margin deposit) and the balance on or before the maturity of the contract.
Holding Currency on Account
You do not need to transmit funds overseas as soon as you buy currency. Your funds can be held in client currency accounts until either you need to make a payment or until you have opened up a new bank account abroad.
Once you have bought an overseas property or emigrated to a new life abroad, you will still need to buy and transfer currency. Currency fluctuations however, can make budgeting impossible, and over time the international transfer fees and commissions charged by your bank can soon add up to a tidy sum.
As referred to above you can also opt to fix regular payment transfers for any purpose. Apart from the peace of mind this offers in terms of budgeting, a currency house is unlikely to charge you or certainly charge less than a bank would for this service. The process is very straightforward and requires some simple form filling and agreeing a currency rate:
Example: Let's assume that your overseas mortgage is EUR 1,200 every month.
To fix an exchange rate we will add up all 12 payments and give you an average rate for the year (in this example 1.40).
This way the same exchange rate applies to each month and the Sterling cost will be constant.
Example of the savings in one year based on the example above:
12 x £25 (TT fees with your bank) - £300
12 x 2% (commission charged by your bank) - £207.19
Total in year 1= £ 507.19
Over a 15 year mortgage =£ 7,607.85
For country specific finance guides please click here.
Mortgages
There can be numerous benefits to obtaining a mortgage or re-mortgage in order to finance the purchase of your overseas property. This is also referred to as 'gearing up' your money and is great way to increase your buying power. When buying property for investment purposes, financing the purchase can be particularly attractive as it may allow you to achieve a much higher return on investment.If you are interested in gearing your capital (and have a budget of around £400,000 +) then you may be interested in our Investor Services Division.
Can I afford to repay a mortgage?
You should make sure that you can afford to repay any loan you take out, remembering that on top of these repayments you will also have the initial purchase and furnishing costs (please see our section on furnishing overseas property), ongoing costs and taxes. You should try and avoid being totally reliant on forecast rental income in order to repay a mortgage. Even in the most flourishing market always be as conservative as possible. Between 4-8 weeks is a sensible forecast in an emerging market (you may of course achieve far higher occupancy levels than this).If you are relying on a loan to finance your purchase be sure to obtain an agreement in principle prior to parting with a deposit. Off-plan properties always require an initial deposit followed by staged payments throughout the build process. A mortgage broker may provide this service for you at no extra cost.
Is a mortgage the right thing for you?
The first thing to establish is whether or not obtaining finance is an appropriate course of action for you? Are there any reasons why you might not be able to obtain finance or would prefer not to have to service a monthly debt? There are advantages to making a cash purchase as you don't have to worry about any outstanding debts. This might be an attractive option where the property is intended to be a permanent base (and is common in retirement circumstances, i.e. you might have a large amount of equity in a UK property which is released to fund the overseas purchase - please see our section on Retiring Overseas). However, this still leaves a lot of money tied up in a relatively illiquid asset.If you do decide to go for a mortgage, you will have to make a decision as to whether you opt for sterling or foreign currency. UK banks will not lend directly on overseas properties, because other countries' property purchase systems are outside their sphere of influence and understanding. The relative merits of borrowing in a foreign currency or releasing equity in the UK very much depends on where the property is situated and an assessment of your personal circumstances. Should you wish to remortgage your property in the UK please feel free to contact us for advice. We have an experienced in-house mortgage broker who has spent the last 10 years specializing in the finance of buy to let property in the UK.
Borrowing in Foreign Currency?
You can either contact a local bank directly or use a UK-based overseas mortgage broker who will arrange an overseas mortgage for you, usually with a local bank. In practical terms the broker is a very useful source of information and can talk you through the entire process, in addition to liaising with the bank and other relevant parties. If this is your first purchase and you are unfamiliar with the process we would strongly recommend using a well respected UK broker such as Conti Financial Services, or BulgarianHomeLoans.com (for Bulgarian Loans, obviously!). This will save you a great deal of time in terms of correct filing of documents and will provide a useful sounding board for peace of mind. Brokers will typically charge (dependant on the location and mortgage product) up to 1% brokerage fee, despite the fact that they generally get paid commission by the bank as well. Which is better, foreign currency or sterling?
Foreign set-up costs are likely to be more than remortgaging in the UK though the interest rates in the UK may be much higher than many other countries (Cyprus and Spain to name but a few). Look at where you are purchasing first, after which we will be happy to discuss various options with you. Foreign currency mortgages are generally less generous than UK ones. Typically you will need a deposit of at least 20% (normally 30%), and the repayment period is usually 15-20 years, rather than 25 years +. Most mortgages are repayment loans, and significantly, calculated on an affordability basis. In many European countries only a third of your disposable income may be taken up by debt, so the bank will work out the maximum you can afford per month given your incomings and outgoings, and work backwards from that point to produce a loan sum.It is therefore common for UK buyers to raise maybe a 30% deposit by extending their UK mortgage and then take a 70% foreign currency mortgage to capitalise on relatively low interest rates there.
So, as you can see you need to assess your personal situation and look at the location in which you are intending to purchase.
'Click here for an example of how one of our clients financed the purchase of their villa in Cyprus last year' Currency
When considering the merits of borrowing in a foreign country you must also consider the issue of fluctuations in Currency and how that will affect your mortgage repayments. The currency risk can be significant but it reduces if you are receiving rental or other income in that currency. For instance, if you bought in Europe using a local euro mortgage and rented out to European tenants in Euro's, then the property might be self-financing in Euro's, with no need for sterling input.However, where you need to make monthly payments from sterling into another currency you can actually fix a rate with a currency house for up to 24 months so you will know exactly how much money is being debited from your UK account regardless of what happens to the currency. Please see below for services offered by a currency house or check out our Purchase Example referred to above to see how using a currency house works practically.
Services Offered by Currency Houses
Spot Trades
A spot trade is where you buy currency at the prevailing exchange rate and pay for it straight away (typically for a deposit payment or for the entire purchase if you have full funds available). Forward Currency ContractsA Forward contract is where you fix the exchange rate now for a specific date in the future (up to 2 years ahead). In layman's terms you are buying now, paying later. To lock yourself into a guaranteed exchange rate private clients will have to pay for at least 10% of the value straight away (a margin deposit) and the balance on or before the maturity of the contract.
Holding Currency on Account
You do not need to transmit funds overseas as soon as you buy currency. Your funds can be held in client currency accounts until either you need to make a payment or until you have opened up a new bank account abroad.Once you have bought an overseas property or emigrated to a new life abroad, you will still need to buy and transfer currency. Currency fluctuations however, can make budgeting impossible, and over time the international transfer fees and commissions charged by your bank can soon add up to a tidy sum.
As referred to above you can also opt to fix regular payment transfers for any purpose. Apart from the peace of mind this offers in terms of budgeting, a currency house is unlikely to charge you or certainly charge less than a bank would for this service. The process is very straightforward and requires some simple form filling and agreeing a currency rate:
Example: Let's assume that your overseas mortgage is EUR 1,200 every month.
To fix an exchange rate we will add up all 12 payments and give you an average rate for the year (in this example 1.40).
This way the same exchange rate applies to each month and the Sterling cost will be constant.
| EUR | GBP | |
| January | 1,200.00 | 857.14 |
| February | 1,200.00 | 857.14 |
| March | 1,200.00 | 857.14 |
| April | 1,200.00 | 857.14 |
| May | 1,200.00 | 857.14 |
| June | 1,200.00 | 857.14 |
| July | 1,200.00 | 857.14 |
| August | 1,200.00 | 857.14 |
| September | 1,200.00 | 857.14 |
| October | 1,200.00 | 857.14 |
| November | 1,200.00 | 857.14 |
| December | 1,200.00 | 857.14 |
Example of the savings in one year based on the example above:
12 x £25 (TT fees with your bank) - £300
12 x 2% (commission charged by your bank) - £207.19
Total in year 1= £ 507.19
Over a 15 year mortgage =£ 7,607.85
