Introduction

With the dramatic increase in prices of property in the UK, many people are looking overseas to purchase a home. The problem is, it can turn sour once they get into the intricacies of dealing with overseas Solicitors, Banks and Developers. One area that has become more flexible, however, is arranging a mortgage overseas. This article discusses the ways you can take out a mortgage abroad, points out the disadvantages and tells you what the differences are between a foreign mortgage and a UK based one. It also talks several times about the overseas buy-to-let market.

European and US Mortgages in Summary

You can get a reasonably competitive mortgage in the US and most of the established European overseas property markets like Portugal, Spain, France, Switzerland and Italy. The rule of thumb is, the more established the market, then the easier it is, so in emerging markets like Greece, Bulgaria, Poland, The Caribbean and Israel, you can get a mortgage - but the rates will be considerably higher (see below), the amount they will lend is less and they also have stricter borrowing terms.

There are not too many fundamental differences between a foreign mortgage and a UK based one, but bear in mind that the risks of buying a property are the same as in the UK. In Europe it is not the norm to see Mortgages offered interest only and it is very rare to see buy-to-let mortgages. They will usually base the amount you can borrow on how much you earn rather than the rental income and also there is not really a market for self-certification mortgages. A much wider range of secured loans is available in the US.

Pros and Cons of Foreign Mortgages

In the established property markets like France, Spain and to a lesser extent Portugal the lenders have become much more flexible when dealing with UK buyers. Although things can often change quite dramatically over the period of a mortgage, it is worthwhile noting that Interests rates on the European Continent are typically lower than in the UK. The problem is that the low interest rates are starting to attract a lot of buy-to-let investors, who are finding that the UK market has begun to mature.

If you do plan to let the property out the income can be offset against the loan for tax purposes. Check out the tax rules in the country you are proposing to buy in, but some have very expensive wealth charges payable on equity. Borrowing the money to make the purchase rather than buying outright could mean you avoid this tax.

One of the disadvantages of taking out a foreign mortgage is that, as it is in another currency, it adds another layer of risk. If, for example, the Euro goes up - it will cost you more to buy the currency using your sterling. You can however minimise this risk by using services provided by currency specialists and banks to fix the exchange rate for a set period and manage monthly transfers.

How to arrange a Foreign Mortgage

In each country the local lenders are increasingly catering for UK buyers and some UK based banks will also offer mortgages on overseas property. For example, The Halifax will provide mortgages on properties in Spain and Barclays will lend on properties in most of the mature European countries like France and Spain and Italy.

You can use a UK based mortgage broker to research overseas mortgages. Conti specialises in overseas property purchase, while other brokers, like Savills, advise on mortgages in different markets. Barclays Bank noticing a growth in the market also launched an on-line service that gives tips for people looking to buy abroad.

Although you might prefer to deal with someone UK based you can also use an overseas broker to arrange a mortgage. Otherwise you can go directly to a lender. This is probably easiest if you are using a UK bank but bear in mind that some overseas lenders have a UK presence. Credit Foncier of France recently opened a London branch to target people looking to buy French properties and Piraeus from Greece has also launched a service for British based buyers.

There is the obviously the language advantage of dealing with a UK lender and you might be tempted to go for one with a familiar name. If our looking for an interest only mortgage you will probably need to go for a UK based bank, or at the very least one with strong UK ties.

Most brokers recommend looking at local lenders as many offer the cheapest deals and offer the widest range of fixed and variable rates. Also lenders in the popular European property markets will nearly always employ an English speaking team - so language shouldn't really be a barrier.

You will almost certainly have to check out the rules in the country you are going to buy, but a local lender could be bet if you are going for a specialist scheme like a France based sale and leaseback.

Final Summary

As mentioned before the rates can be lower than in the UK, for example in France, Spain, Italy and Portugal the rates can start as low as 3.5%. In the less established markets like Bulgaria and other eastern European countries the rates can start at around 6%, whereas countries like Greece and Cyprus roughly fall half way between the two at 5%. The borrowing criteria are typically tougher than in the UK and you should expect to be able to borrow only around 70-80% of the property's value.

The documentation you need is proof of income and you usually have to prove you can meet mortgage repayments through your own earning rather than rental income