In the following article we focus on the different options open to you if you’re looking to buy an overseas property and are not in a position to make a cash purchase.
If you borrow the money at home, but your income is going to be paid in the country where you are buying your new home, you will need to consider the foreign exchange exposure, as the monthly cost will fluctuate with the exchange rate. You can use forward foreign exchange deals to fix the exchange rate for a period, but ultimately the exposure will remain and you should take
advice on how to manage the risk.
There are basically three options to finance your purchase:
1. Re-mortgage your existing home – This can be the easiest option if you have sufficient equity in your home. However, the repayments will need to be covered and you will need to satisfy the lender that you have the income or other assets to make the payments. If you are going to be earning in a foreign currency this will leave you open to exchange rate risks.
2. Borrow from a domestic bank – There are some banks that will lend on overseas property, particularly those with international networks. Your relationship with a domestic lender can seem an advantage, but you will need to compare the terms with what can be achieved in the country where you are buying the property. The availability and terms will also vary depending on where you are buying the property.
Higher deposits and shorter terms than would be seen on domestic mortgages may result in higher repayments.
For newer and less popular locations it may be more difficult to find a bank willing to lend and the terms may be less favourable.
In some countries the location of your mortgage can have tax implications at home or abroad for capital gains and inheritance tax. There may also be implications for the taxation of any rental income if you plan to rent out the property for all or part of the year. It is worth taking advice to ensure you understand any issues.
3. Arrange an overseas mortgage – There are many brokers able to identify overseas mortgages available to foreign buyers on favourable terms, or you can approach the major banks yourself.
There are many places where interest rates may be lower than in your home country. The terms available will also be different with many working out affordability based on your income. With different data protection laws across the globe it can be difficult to share personal information across borders, so a strong credit rating at home does not necessarily apply abroad. You may not therefore get the same deal as would be available to a local with established credit.
The process used to assess your eligibility for a mortgage will be similar wherever you apply for a loan and will involve an assessment of your income, assets, spending and credit history. The loan to value and other terms will vary however.
You should consider the pros and cons of borrowing in the local currency. It will tie the currency to the value of the property, but you need to consider which currency your other assets and income are reliant on. If your income is tied to your home currency the cost of your payments will fluctuate with the exchange rate – positively or negatively.
The regulatory environment in the country should also be considered to see what protection you will have in the event of problems, such as the failure of the lending bank.
Whichever option you choose it is worth obtaining advice from an adviser who has experience of the market where you are planning to buy. There can be tax implications of your funding approach as well as other local issues.
A broker will be able to identify your options quickly and having an idea of what is achievable (and ideally securing an agreement in principle) will ensure that you look at properties that you will be able to afford.
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