Mortgage Advice for First Time Buyers, First Time Buyer Mortgages and First Mortgage Advice

Buying Property Abroad

How to Finance your Property Abroad

Note that the contents of this site are for general information only. The publishers of this site do not offer personal financial advice and recommend that expert advice is sought from experts. The value of a property can go down as well as up. Your property or home may be at risk if you do not keep up payments on a loan secured against it.  

Raising the finances and considering the costs of buying, running and selling your property abroad are important:

1. Remortgaging or taking out a further advance your UK property

One way to raise the finances for a property abroad is to take a further advance which means increasing your mortgage with your existing lender. An alternative is to remortgage with a new lender and you may wish to use this opportunity to obtain a better deal. You can increase the size of your mortgage against any new increased value of your home. The difference in pounds between your old mortgage and new mortgage - the equity - may be enough to pay for your property abroad outright.

If you are tied into a deal with your current lender you will have to pay a redemption penalty to leave. If the amount you save in interest repayments with a different lender does not justify paying the penalty, you can take a 'further advance' with your current lender. This means staying put and increasing the size of your existing mortgage. The lender may give you the further advance at the same interest rate as the rest of your mortgage. Or it may apply its more expensive Standard Variable Rate (SVR) to the additional funds borrowed. You should seek financial advice from a mortgage advisor.

To remortgage, you may have to pay legal and valuation fees as well as an arrangement fee. The mortgage on your UK property will most likely be larger - although you will be paying a lower interest rate on it. · You will need to consider any cost involved with remortgageing as opposed to taking a further advance. If for any reason you are no longer receiving an income, it is unlikely you will be able to remortgage but an equity release scheme may be suitable.

To find out more about the costs and returns of remortgaging a property of yours, contact an expert in remortgageing and equity release here.

If you are transferring money to a foreign country, you will want the best exchange service.

2. Raising cash by using your savings

It may be that you have enough in savings to buy your property abroad outright.

Bear in mind that notice accounts can require anything from seven to 120 days' notice if you want to make a withdrawal without paying a penalty. Most notice periods are between 30 and 60 days. Bonds or term accounts may not allow any withdrawals before the maturity date.

If a withdrawal is permitted you could pay a heavy penalty. If you are transferring money to a foreign country, you will want the best exchange service. To find out more about the costs and how you can benefit, contact a good exchange service.

3. Equity Release

The most popular type of equity release is a lifetime mortgage. This is when you take out a loan against a certain percentage of your property (up to 50 per cent depending on your age), which you can choose to receive as a lump sum.

The interest on the loan - which is usually fixed and at a higher rate than on a standard mortgage - accumulates over your lifetime. No repayments are due when you are alive. Instead the loan is repaid on your death after which time the house must be sold, typically within a year. All schemes regulated by industry body, SHIP (Safe Home Income Plans which can be found at www.ship-ltd.org), carry a no negative equity guarantee i.e. you will never owe more than the value of your home.

However, even if you took a lifetime mortgage on just 25 per cent of your home, this still means that your beneficiaries could be left with nothing if you go on to live a long time. Variations to the above scheme are available which allow you to make regular interest only payments on the liability, thereby potentially negating the negative impact of compound interest accumulation.

The other form of equity release, home reversion plans, involve selling a proportion of your property to a finance provider, usually at a discount to the market value. Upon death or sale of the property the finance provider takes a proportionate sum representing their percentage share of the property. However, they are not as popular as lifetime mortgages due to current low interest rates.

If considering a lifetime mortgage as a method of raising capital for your property abroad, it is important to note that they are not appropriate for everyone and will not be suitable in all situations. Should you be contemplating equity release you should consider discussing it with potential estate beneficiaries and also check any impact on state benefit entitlement.

For advice on equity release, contact a mortgage advisor who specialises in equity release.

4. Getting cash out of your pension

If you have a personal pension fund you can take 25 per cent of it as a tax-free cash lump sum. Currently, the remaining 75 per cent must be used to buy an annuity and you have to be aged between 50 and 75 to withdraw cash from your fund regardless of whether you are retired or working.

It is important to note that accessing pension benefits prematurely is not suitable for most people and will reduce your retirement income. Any income received from a pension is taxable and may result in you paying a higher marginal rate of tax. Should you wish for advice in this area, you should consult a pensions specialist.

5. Taking out a secured loan

Secured loans are another way that cash can be raised to buy an overseas property.

The advantages of secured loans are that they are fairly easy to obtain, you can borrow large amounts and the loan can be paid back over a long period, thereby reducing monthly repayments – but this will substantially increase the total amount of interest paid.

This type of loan is only available to property owners or mortgage holders. The lender can forcibly sell your house to get their money back if repayments are not paid. The ‘secured' part of its name means the lender – not the borrower has security, as if there are problems, your home can be repossessed. As the loan is secured, the lender is relieved of most of the financial risks involved – they may offer attractive terms for the borrower on interest rates and repayment period.

Loans secured against a property that is already mortgaged are known as second charges, whereas loans secured against properties that have no mortgage in place are known as first-charge. The amount that can be borrowed, the interest rate and the term available will depend on three factors: your ability to repay the loan, your personal circumstances and the lender issuing the loan.

Warning: Your home may be repossessed if you do not keep up repayments on a loan secured against it.

6. Selling your endowment policy/policies

Whether or not your endowment policy is on target to pay off your mortgage, you still have the choice of surrendering or selling the policy to raise funds for your holiday home. Surrendering the policy (or cashing it back in with your life insurer) can incur penalties, meaning you get less than its true worth. But if you sell it onto an investor you could save around 20 per cent.

Bear in mind you will not be able to sell your policy if it is less than seven years old or worth under £1,500. It will take around two to three weeks before the funds arrive in your account..

7. Taking out an Overseas Mortgage for your Property Abroad

You can take out a mortgage on your property abroad but this may have to be from a lender of the country in which you buy. Consult an overseas mortgage specialist for a mortgage quote.

To buy a property abroad you will need a typical minimum deposit of 20 per cent of the property valuation or purchase price. Self-certification mortgages (where you declare you own income), non-status (if you have problems with your credit score) and interest-only mortgages are not usually available overseas. How much you can borrow will be calculated on an affordability basis - not on income multiples as is the case in the UK. For example, your outgoings such as your UK mortgage AND your foreign mortgage, utility bills, personal debts, school fees and so on, must not exceed 40 per cent of your net monthly income.

Almost exclusively, a UK bank will not lend on a property abroad. You will have to use a lender from the country in which you are buying. Depending on where you buy, you can often choose to borrow in Euros, Sterling or Dollars. If you borrow in Sterling your interest rate will be measured against the Bank of England base rate or Libor (The London Inter-bank Offered Rate). If you borrow in Euros, you will pay the Euro interest rate set by the European Central Bank (ECB). This is sometimes known as Euribor. It is usually priced a couple of percent lower than the UK base rate. If you borrow in US Dollars your interest rate could be measured against LIBOR or the US Prime.

If available, fixed rate mortgages overseas come with very high redemption penalties, if you leave within the fixed rate period. You can often choose to take mortgage over 15 or 30 years rather than the standard 25 in the UK.

Many foreign banks require that the loan is paid off by the time you reach a certain age. Depending on the country, it could take up to 20 weeks to complete on the mortgage. During this time you will be subject to currency fluctuations, which could result in the same property costing more. You can mitigate this risk by arranging a 'spot transaction'. This means transferring the funds immediately to the agent or overseas vendor, in line with the exchange rate at that time.

Find out more about the costs and returns of remortgaging a UK property of yours.

If you are transferring money to a foreign country for a property abroad, you will want good currency transfer adv

8. Sharing the Costs of a Property Abroad with a Co-owner

You can take a joint mortgage with family or friends with similar holiday interests providing you can both prove a sufficient income. Buying a property abroad with someone else increases affordability and reduces costs. As in the UK, ownership can be legally documented in any proportion, although both parties will be jointly and severally liable for the loan repayments. Be aware that buying a holiday home or property abroad with another party means you will be entering a long-term financial, legal as well as social arrangement.

A co-ownership agreement is highly recommended so that there is no arguement over who uses the property when, how income is split, who owns what, what happens when one party wants to sell/move in, smokers, family, pets, renting.. etc.

For a quote on drawing up a co-ownership agreement for you property abroad, contact our solicitors.

9. Renting out the Property Abroad

If you would like your overseas property to help pay for itself, you can rent it out.

Leaseback schemes: Some countries - predominantly France - offer leaseback schemes. The schemes often just apply to new developments that are built for the purpose. You sign a contract with the leaseback management company who in return will guarantee you a rental income. This will be at a given net annual rental yield for a fixed period of time - usually around 10 years. During this time, you will have access to your property for between two to three weeks each year but you may not be able to specify when. The management company will be responsible for the cost of maintaining the property - and the maintenance itself. These schemes are suited to buyers who need the security of a guaranteed rental income and regard their holiday home primarily as an investment.

Renting out your Property Abroad Through an Agent: You can use a UK-based property consultancy working in that country to rent your holiday home on your behalf that will charge around 20 per cent of your rental income. Be aware that you may face long void periods - especially out of season - when you will have to find your own mortgage repayments. For English-speaking property consultancies that are registered with industry body, look at The Federation of Overseas Property Developers, Agents and Consultants (FOPDAC).

Visit www.fopdac.com

Particularly if you have a mortgage on your overseas property that you pay each month, it can make sense to rent it out for the time that you are not there.

Holiday property abroad leaseback schemes: If you have bought in France or some parts of Italy you could consider joining a leaseback scheme, although you will be restricted to certain new developments that are built for the purpose.

The scheme involves signing a contract with the leaseback management company who will guarantee you a rental income for a fixed period of time – usually 10 years. This income will be given as a net annual yield.

During the leaseback period the management company will be responsible for both carrying out the maintenance and the cost of it. However, your access to the property will be restricted to between two and three weeks a year, and you may not be able to specify when these weeks are. Leaseback schemes are therefore best suited to buyers who regard their holiday home primarily as an investment.

Renting out your property abroad through an agent: You can also use a UK-based property agent to rent out and manage the property on your behalf. This will cost in the region of 20 per cent of your monthly rental income.

Renting out your property abroad yourself: To keep costs down you could advertise your home on a holiday home lettings website, which typically means a one-off fee of around £100 for 12 months. Be aware that you may face long void periods – especially out of season – when you will have to find your own mortgage repayments.

Word of mouth: If you consider any monthly income generated from your holiday home a bonus, word of mouth can be very effective. You could start by sending an email to your contacts book with details, prices and several clear pictures of the property.

For tax advice on the impact on any income brought into the UK, ask tax advisors for a quote for tax planning.

10. Budgeting for your Holiday Property Abroad

The true costs of a holiday property abroad

Drawing up a budget for the familiar things in life such as utility bills or children's clothes can be taxing enough. But if you are budgeting to buy your first home abroad, there's no room for error. We can guide you through the realistic costs of buying, selling and renting out your property abroad. You should ensure that you have determined what your projected costs will be wherever you are thinking of buying your property abroad.

11. Buying your holiday property abroad local purchasing taxes

Regardless of where in the world you choose to buy, it is almost certain that the government of that country will charge some kind of property tax. But of course its name will differ and so will the cost.

Some countries make UK Stamp Duty – which is charged at between one and four per cent, depending on the value of the property – appear cheap. For example if you buy a resale property in Spain you will pay seven per cent of the property price in Resale Purchase Tax. If you buy a brand new property it will still cost you seven per cent in IVA (or VAT).

In Italy, buying property is more expensive still. The combined taxes – including Registration Tax and Mortgage Tax – cost 10 per cent of the property price.

Even taxes within the same country often vary. For example, in Croatia Real Estate Transfer Tax is payable at five per cent if you purchase a resale home but just two per cent for an off-plan property.

Property abroad legal and valuation fees: It is highly recommended that you hire an English-speaking solicitor or property lawyer in the country in which you are buying. To pay for this you should budget for between one and two per cent of the property price although in some countries – Spain for example – lawyers can cost up to three per cent.

Also be aware that in many countries the same lawyer will act for both buyer and seller. In this case you may want to seek separate independent advice which will hike up costs further.

Property abroad agency fees: Many people use an overseas property agent based in the UK when buying abroad. They have contacts and experience and will do all the legwork for you. In some cases you won't even have to visit the country. But, depending on the level of service offered, an agent could cost up to seven per cent of the property price.

12. Maintenance

As well as paying for the upkeep of your property, which is especially important if you intend to rent it out, you will also encounter day-to-day running costs. These include local taxes (the equivalent to our Council Tax) and – if you have bought in an apartment block – ground rent and service charges. There are also utilities such as water and electricity to consider.

The running costs require you to have a local bank account as you will need to pay in local currency. To receive utilities you may have to set up a Direct Debit from this account.

13. Selling your holiday property abroad

It may not be what's on your mind now, but selling property abroad also incurs costs. It will vary depending on which country you are in – but don't forget these costs.

14. Capital Gains Tax on your holiday property abroad

If it is your second home you may have to pay Capital Gains Tax on any profit made when you come to sell it. Rates of CGT vary between countries and are often tiered according to the length of time you have owned your property. Sometimes, this tapers down to zero. For example you are CGT-exempt in France after 15 years and after just three years in Croatia.

You may also have to pay CGT in the UK but the tax you have already paid overseas is usually deducted from the bill. Each individual also has their own personal allowance they cannot be taxed on.

If your property abroad is not your primary residence, you will want to take tax advice.

15. Estate agent costs

Overseas estate agents can make the ones in the UK seem very competitive! In some countries, such as France, it is not uncommon for the seller to pay between 10% and 12% of the property price. In Italy, the typical 6% estate agency fee is shared between buyer and seller.

You can cut costs and increase exposure of your property by using a web-based English-speaking property agent. You may pay a small one-off fee to advertise your property on the site but the agent often takes most of its fee from sharing the commission with their overseas estate agency contacts.

More information on buying property abroad:

Researching buying a property abroad l Why buy a property abroad? l Points to Consider when buying a property abroad l  Building a property abroad l General tips for buying a property abroad l Buying a property abroad with friends l Choosing your new property  lCould buying a property abroad secure your future l Insuring your property abroad l Buying property abroad as an investment l Living permanently in your property abroad l Maintaining your property l Property abroad - don't stop at Europe l Property abroad - FAQs l Renting your property abroad l Tax and your property abroad  lThe responsibilities of owning a property abroad l The true costs of an overseas property l Viewing your property abroad l Legal considerations when buying a property abroad 
 


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