JUNE 2011 |
www.opp.org.uk WORDS | Clare Nessling Minimimal errors
Financing an overseas property purchase can seem daunting for many buyers, but if they seek the right advice and put in the proper amount of preparation, they can avoid some common mistakes. Too many clients still assume that buying a property abroad will be similar to buying one at home, including the whole mortgage process. It isn’t.
I
’m not trying to put people off – with overseas mortgage rates at an all time low and some great property bargains
to be snapped up, there may never be a better time to buy. But 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 to avoid. Accepting the fi rst mortgage deal offered
If someone has made a spur of the moment decision about buying an overseas property, they’ll feel under pressure to get the fi nancials sorted as quickly as possible. But this doesn’t mean they should accept the fi rst offer they receive, which could 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. Every borrower’s needs are different, so in order to secure the best possible deal and the most suitable terms, it makes sense to approach a specialist broker who will have relationships with a number of lenders in the chosen country, and know the exact mortgage application requirements for each one. It will manage the whole process. Committing to more than they can afford It’s so easy for clients to focus all their attention on the property, as that’s what many believe to be the fi rst part of the buying process. The fi rst stage should, in fact, be to establish how much they can afford to spend. 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 when conducting their property search. And it will avoid potential disappointment later on in the buying process, if they’ve got their heart set on a property which is simply beyond their means. An AIP will put them in a much better position with
agents and developers and prove to them that they’re a serious buyer. Any private seller, given a choice, will also prefer someone who can demonstrate that they’ve got their fi nance in place, and buyers will be better placed to negotiate price. 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! Ignoring the implications of currency fl uctuations A crucial factor when making decisions about fi nance is whether to take out a sterling or foreign currency mortgage. Many people just go for whatever offers the best rate, without thinking of the wider context or considering the implications of their monthly 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. For example, if they’re planning to rent out their property in Brittany through a French agent, it makes more sense to take out a euro mortgage, as the rent received can be held in a French bank account to service the monthly mortgage payments, thus avoiding the fl uctuation in currency (and associated cost) when transferring euros to the UK each month. If the property is to be used solely for personal use, a homeland currency mortgage could provide a more stable solution, as there are no potential currency fl uctuations. 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. Relying on rental income to pay the mortgage
Foreign lenders are never going to rely on potential rental returns as security for a mortgage during the application process. And don’t let clients assume that renting out a property will be easy, and
that repaying the mortgage will be just as straightforward. There are undoubtedly 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 the rental market can be. Proximity to basic facilities like
restaurants, shops and a beach are important, but so is talking to people who already live/own property in the chosen area to get a better understanding of the rental prospects there. And clients should also consider the property off-season - many resorts (beach and ski) are seasonal and practically shut down when the tourists return home.
Not factoring in all the additional costs 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.
Clare Nessling is operations director at Conti, the overseas mortgage specialists.
There may be life assurance costs too – French banks, for example, require mandatory life assurance and the cost of this policy can be signifi cant in the overall cost of borrowing.
All of these potential short and long term costs must be considered by your clients, as they can add a lot of money to the cost of acquisition. In France and Portugal, it tends to add around 10 per cent, rising to 12 per cent in Spain and 15 per cent in Italy. It’s lower in the USA at around 5 per cent. Clients should always take
independent advice from a lawyer who is not connected to their seller, estate agent or property developer. They shouldn’t take advice from a
lawyer who is recommended to them by a developer – it’s highly unlikely that they’ll admit to any problems. They should also ensure that an independent valuation of the property is carried out before making a move.
BUSINESS
MORTGAGE MATTERS | 43
Cosy | deals don’t really exist - get your clients to think it all through very carefully
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