Financing your property

At any one time upwards of five million Britons are considering either buying a holiday home overseas, purchasing a place abroad for investment or contemplating retiring to a sunnier country. In fact, a recent Alliance & Leicester survey found that one in eight Britons aged 50 and over plan to retire abroad by 2010 – that’s around 2.5 million people – but how do you finance the purchase of your dream home in the sun?

 Mortgages

In most overseas countries popular with British buyers – for example Spain, France, Italy, Portugal and Florida – it is possible to arrange a mortgage up to 75-80% of the property’s value against the overseas property through a mortgage broker or a bank either in the UK or in the country where the property is located and you may do so in Sterling or Euros.

We suggest that anyone planning to buy overseas for investment and rental purposes to take out a mortgage in Euros. This type of scheme offers the buyer the advantage of lower rates, currently around 3.5% with a 75 per cent loan to value (LTV), compared to 5.5% for a Sterling mortgage.

If an owner is to receive income from rental in Euros that will be paid into the bank account they are obliged to hold in Spain, then the most sensible option is to take out a Euro mortgage on any second (overseas) property.

 Cash Purchases

An alternative route to a mortgage is to raise equity (cash) by remortgaging against your property in the UK, a popular choice in recent years due to the huge increase in house prices that has enabled thousands of people to build up large equity in their homes.

Some buyers will have a preference to release equity from a UK property and buy the second home overseas for cash. A disadvantage for cash buyers, for example in Spain, is Inheritance Tax, which operates somewhat differently to the UK and is based on the net value of the property, that is the value of the house less any mortgage. The advantage of a cash purchase is that as most people are paid in Sterling they avoid the currency risk of having their income in one currency (Sterling) and monthly mortgage repayments in another (Euros).

 Forward Contracts

Many people often expose themselves unwittingly to ‘currency risk’ by omitting to take into account currency fluctuation between the signing of a sales contract and completion i.e. wherein they hand over the money. After all, it is not uncommon for a transaction to take three to six months to complete, and if history as recent as last year is anything to go by the Euro could fluctuate as much as five cents against Sterling.

While this may seem small change, on a Euro 100,000 purchase price (around £70,000 – an amount that doesn’t buy much overseas in 2006), a five-cent fall from E1.45 to E1.40 to the £1 would leave you £2,463 out of pocket. However, you can protect yourself against currency risk by arranging a ‘forward contract’ at the time of purchase, effectively fixing now the exchange rate to take delivery of the currency in the future. Most forex dealers (Moneycorp or HIFX) offer the service between two days and two years’ duration, an especially effective device for those buying a property ‘off-plan’ which can often take 18 months to two years to completion.

 Buying Off-plan

Buying off-plan, literally from the plans, although often a show house can be viewed, is common practice in Spain and increasingly in other European countries. When buying in this way, especially in Spain, it is the norm to pay in three installments: 50% on signing the sales contract, 25% six months prior to completion and the balancing 25% when you receive the keys.

A forward contract is particularly effective when buying in this manner as you can fix the currency rate at an agreed figure with the broker to ensure that you pay no more than the rate agreed in the future. Do be aware, however, that despite ‘fixing’, the exchange rate may still work against you i.e. increase to a figure greater than the one you have agreed. In such a circumstance your only concessions are a reassurance in knowing that the market could have worsened and that you are no worse off then when you agreed the rate, leaving you knowing exactly what your financial commitments would be in the future.

 Practicalities

Should you choose to take out a forward contract a 10% deposit is the minimum required to be lodged with the forex broker, with the balance payable prior to the maturity of the contract. Any money deposited with the broker will be placed in an ESCROW account, effectively a protected customer account held at the broker’s bankers. Customs & Excise certification gives the consumer added guarantees that their money is safe and secure.

Should you, instead, wish to pay for the property by cash or via a monthly mortgage payment you will be required to open a bank account in the country in which you are purchasing; a procedure your solicitor will gladly help you with and for which you in person will need to be present to sign the necessary documentation. Lastly, when buying a property in Spain you are required by law to have a fiscal number, known as an NIE. As a fellow EU member state the paperwork is issued as a formality and, on request by you, your solicitor will apply for it on your behalf.