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Overseas Mortgages

 

Buying abroad

When buying a property abroad you have two routes for raising a mortgage – either you use your UK home or you get one on the foreign property market.

To extend your UK home's mortgage you'll need to have enough of a gap between the value of your home and your existing mortgage to pay for the overseas property and still leave enough equity in your home to satisfy your lender. This is likely to be 10% - 20%. And your lender will need to be satisfied that you can manage to keep up the increased interest payments.

Alternatively, you can apply for a mortgage from a high street bank to buy abroad. Currently, Santander and the Spanish arm of Halifax offer mortgages for buying in Spain, while Lloyds TSB and Barclays lend for home purchases in the main Western European countries (France, Spain, Portugal and Italy) as well as countries like South Africa, Dubai and the US. But you are likely to struggle to find a mainstream bank willing or able to lend on properties in more exotic countries.

There are also brokers who specialise in providing overseas mortgages – some have links with estate agents and lawyers in the country you want to buy a property in. But, unlike high street banks who sell overseas mortgages, brokers are not covered by the Financial Services Authority (FSA), so you cannot seek redress if you are mis-sold a mortgage.

Or you can ask a bank in the country where you're buying your property abroad to lend you the money. However, just like in Britain it's become harder to get a mortgage overseas too. Since the housing crash, lenders have raised the deposit needed to get approved and lending criteria has been tightened up.

Unless you are very experienced in purchasing abroad, it's important to seek some sort of legal advice before signing the contract for a property or paying a deposit.

Your options are:

1. Raise money on your existing home in the UK

2. Use a UK bank which offers overseas mortgages

3. Go to a UK broker specialising in mortgages on properties abroad

4. Apply to a foreign bank in the country where you're buying

Home or away?

The first thing to decide is whether you will be paying for your mortgage in pounds or foreign currency. If all your income is in sterling, it's better to get a sterling mortgage otherwise you run the risk of it costing you more when the pound falls in value against the overseas currency.

This doesn't necessarily mean you can't use a local, overseas bank as in popular countries such as Spain, France, Australia and the USA, you can find banks that will lend in sterling or the local currency.

If you have an income in the country where you're buying the property – perhaps from holiday rentals or business – you can raise a local currency mortgage. Just remember that you need to be sure that the income you're relying on will be enough to cover the monthly mortgage payments and any local taxes you have to pay.

How much can you borrow?

Banks will look at your income and your outgoings before deciding how much to lend you on a second mortgage. It will take your existing mortgage payments into account along with your other debts before deciding whether you can afford it.

You will have to show proof of income by either providing your last few months' payslips or accounts for the last couple of years if you are self-employed or have a business. You'll also have to provide bank statements and often references from your employer or your accountant.

Banks will also have a limit on how much you can borrow based on the value of the property. In Australia and the USA, the maximum you can borrow is 70% of the purchase price. In France mortgages are for up to 100% while in Spain you can borrow 80% if it is your main residence but only 65% if it's your second home.

There are also minimum amounts you have to borrow – such as £100,000 in Australia and €50,000 in France.

Don't forget to budget for all the fees and taxes you'll have to pay when buying a property overseas. They are unavoidable and can be a hefty amount. For instance, in Spain they can cost 10%-13% of the purchase price.

Maximum loans by country

Your total monthly commitments on all mortgages and loans can't be more than a fixed percentage of your income.

Australia 50% (of net income)

France 35% (of gross income)

Spain 35% (of net income)

USA 38% (of gross income)

Foreign exchange

Whatever route you choose when buying property abroad, you're going to need to turn your pounds into the local currency. The foreign currency market is fast moving and incredibly volatile.

If you don't take steps to sort out how to move your money abroad before you have to pay for your property you could be in for a nasty shock when the day comes. It's not unheard of for the value of sterling to drop by 10% or more in a matter of months against other currencies. Imagine how terrible it would be to find the cost of your place in the sun has suddenly shot up by 10%.

Of course, it can work the other way, and the pound could climb making your home abroad cheaper. The question is whether you are prepared to take that risk.

You have a number of options to reduce the risk of currencies movements:

Currency exchange options

Forward contracts – These work by fixing the exchange rate at today's price to be used in the future when you're ready to move your money across. Most foreign exchange brokers will allow you to fix the rate for up to two to three years ahead but you'll have to put down 10% as a deposit.

This is a buy now, pay later option and the safest route to guard against the pound falling in future.

Spot contracts – This is the simplest option. You just buy the foreign currency on the day at that day's rate. The riskiest way is to wait until you need to send the money abroad before buying it. Or you can buy all the currency you will need now and deposit it to earn some interest in the meantime.

Target rates – You agree a realistic exchange rate with your broker who will buy the currency automatically when it reaches its target. Some brokers call this method an order to buy or market order. You have to deposit 10% of the amount you'll be exchanging with the broker. But what if it falls and never reaches your ideal exchange rate?

Limit order – this is the minimum rate at which you're prepared to exchange your money. It is often combined with target rates so that you know you'll be trading within a set range. Again, you will usually be asked for a deposit of 10% as collateral.

You can use these two types of market orders to sell currency and the buy or sell orders can be amended at any time before the transaction takes place.

Moving money regularly

For those needing to pay an overseas mortgage, there are ways to protect you from changes in exchange rates. Many established currency brokers will have a regular payment service. Unlike your bank, they will allow you to set up a direct debit to move the money every month at an exchange rate you can fix for up to 12 months ahead.

Using a specialist forex broker

For most of these foreign exchange options you need to set up an account with an established foreign exchange broker such as Moneycorp, HiFX, Currencies Direct, CaxtonFX, FC Exchange, Smart Exchange, and Cambridge FX. It costs nothing to open an account and the brokers will be able to advise you on your options and the fees you'll have to pay.

These specialist FX brokers have better exchange rates than banks. Their prices may only be a few cents better than high street banks but when you're exchanging thousands of pounds it can make a major difference.

The draft Finance Bill published in December 2011 contained a new relief exempting gains on foreign currency held in bank accounts. So, for example, if you have been holding the proceeds of a sale of an overseas home and make a gain on currency movements, you will not be liable to tax from 6 April 2012.

How safe is your money?

There are around 1,500 specialist forex brokers in the UK. Check your broker is authorised under the Payment Services Directive (PSD) by the Financial Services Authority (FSA) – they have to comply with stricter guidelines than those who are simply registered with the FSA.

Authorised firms have to guarantee how they hold clients' cash – this should be in a separate bank account to the company's money – and satisfy the FSA over their financial health.

You can check brokers out on the FSA Register to find out its level of PSD regulation. You can also review the company's financial accounts and its credit rating.

  1. Consider carefully how you will raise your mortgage
  2. Seek legal advice before signing the contract
  3. Budget for all the fees and taxes you'll have to pay

Your mortgage can be repayable in pounds or the local currency - even if you're using an overseas bank

 

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