Clare Nessling, operations director at Conti, outlines mistakes to avoid when financing overseas property
Seeking the right advice and putting in the proper preparation means your clients can avoid some common pitfalls when financing a home in the sun.
Despite the UK property slump and the ongoing euro crisis, the overseas property market is alive and well for British investors, and it appears that more and more of us are seeking a little slice of life overseas.
According to the recent Holiday Lettings’ Insights Report, a quarter of us are considering investing in a holiday home, with Spain being the second most popular location being enquired about by prospective holiday let buyers, after the UK. And, following record traffic in January, Rightmove Overseas reported continued demand for February, with 2.8 million searches performed on its website for the second month in a row.
While this is all positive news, many people still assume that buying a property abroad will be similar to buying one in the UK, including the whole mortgage process. But while the front end loan administration may be similar, this is only the start of what can be a lengthy and complicated process if not managed properly. Each country presents a myriad of eligibility criteria, regulations, administration requirements and language barriers.
It’s crucial that the right advice is sought and that clients are guided through the whole process with care. Here are some common mistakes which you can help them to avoid.
<strong>Accepting the first mortgage deal offered </strong>
If someone’s made a spur of the moment decision about buying an overseas property, they might feel under pressure to sort out the financials as soon as possible. Even those who’ve been thinking about it for some time can find themselves in a panic once they’ve found their property. But this doesn’t mean they should accept the first offer they receive – this could, in fact, have some serious and costly consequences if it’s not suited to their particular circumstances. At the very least, they might not have been offered the best possible rate.
And they should never assume that the same financial products and lending criteria exist in their chosen country as in the UK. Every country is different.
Every borrower’s needs are different too, so in order to secure the best possible deal and most suitable terms, it makes sense to approach a specialist broker who has relationships with a number of lenders in the chosen country, knows the exact mortgage application requirements, and can advise on the most favourable lending rates.
<strong>Committing to more than they can afford</strong>
It’s very easy for clients to focus all their attention on the property, as they usually think that it’s the first part of the buying process. The first stage should actually be about establishing affordability. An ‘Approval in Principle’ will do just that – it’ll tell them exactly how much they can borrow and what price range they can realistically consider. It will also put them in a much better position with agents and developers, proving to them that they’re a serious buyer, and they’ll be better placed to negotiate price with the vendor.
It’s tangible evidence that they can take along when house hunting and it can also lead to their application being fast tracked once they’ve chosen their property. And it costs nothing!
<strong>Ignoring the implications of currency fluctuations</strong>
A big decision is whether to take out a sterling or foreign currency mortgage. Many people just go for whatever offers the best rate, without considering the implications of their repayments increasing if exchange rates move the wrong way. The choice often simply depends on what your client intends to do with the property itself. So if they’re planning to rent out their property in Brittany through a French agent, a euro mortgage makes sense, as the rent received can be held in a French bank account to service the monthly mortgage payments, thus avoiding fluctuations in exchange rates.
Generally speaking, it makes sense for an overseas mortgage and the income used to service the mortgage repayments to be in the same currency, thus avoiding the exchange rate issue.
<strong>Relying on rental income to pay the mortgage</strong>
An increasing number of people are starting to rent their overseas properties out to holiday makers as an extra source of income, or to help with mortgage payments. You may have clients who want to do the same, and while this is often a good idea, they must bear in mind that foreign lenders are not going to rely on potential rental returns as security for a mortgage during the application process.
Many also assume that renting a property will be easy, and that repaying a mortgage will be just as straightforward. There are definitely some areas where the rental markets are particularly strong, but this can never be taken as a given. Sudden changes, such as a low-cost airline deciding to withdraw a particular route, demonstrate just how fragile rental markets can be.
The bottom line is that unless someone can afford the mortgage repayments without relying on rental income, they shouldn’t buy the property.
<strong>Not factoring in all the additional costs</strong>
Prospective buyers should bear in mind that bills don’t end at the asking price. Lawyer’s fees, IVA, local and national taxes, and insurance, must all be met in their host country. And anyone taking out a mortgage needs to consider not just the immediate monthly costs, but also the associated bank and broker fees, arrangement fees and early repayment penalties. There may be life assurance costs too.