A flat in Madrid, a pied-a-terre in Burgundy or a timeshare in Marbella - overseas real estate is a tempting opportunity for many British expats with promises of wonderful culture and an easy lifestyle. Well-travelled UK citizens may find that they want to put down roots in another country, or may want to take advantage of excellent property opportunities in overseas markets, and the number of Brits purchasing property abroad is steadily growing higher and higher. However, purchasing a property abroad comes with its own hurdles and challenges, exacerbated by the need to manage a property purchase remotely. In many cases, Britons will need to secure an overseas mortgage in order to successfully complete the purchase of foreign real estate, but it’s well worth understanding exactly what this entails before embarking on the journey towards an overseas home purchase.
This guide is for anyone who’s considering buying a home abroad who wants to learn a little more about financing their purchase. Throughout this article we’ll discuss the needs of foreign real estate purchases, how an overseas mortgage works and how it’s financed, and a few of the pitfalls to avoid along the way. Of course, it’s vital that anyone buying a foreign property consults a financial advisor before committing to any course of action, to ensure they’ve fully understood the implications it will have for them.
What is an Overseas Mortgage?
So, you’ve decided to invest in a home overseas, and you’re wondering what the next step is. Well, before you start hunting for the perfect place, consider how you’ll pay for it; do you have enough capital on hand to buy it outright? Or will you need a mortgage? In most cases, you’ll need to mortgage the property, and many UK banks offer a dedicated “overseas mortgage” specifically aimed at purchasing property abroad. You can also turn to foreign lenders to provide a mortgage, and whether you decide to choose a UK or an overseas lender will depend on your particular situation.
How does an Overseas Mortgage work?
An overseas mortgage shares much common ground with a standard mortgage. Your mortgage provider will still require the same information that you’d need to provide when buying a home in the UK, such as your income, assets and financial history. In addition to this, they’ll need to conduct a valuation of the property you intend to buy, to assess its value.
One of the key differences which you’ll find between a mortgage for an overseas property and a normal UK mortgage is the amount of deposit that’s required. While it’s fairly common to find high-LTV mortgages in the UK, when buying a foreign property you’ll likely need a much larger deposit - most countries place higher restrictions on foreigners buying property, and UK banks will want more security if they’re lending on property overseas.
The amount you’ll need can vary from country to country, depending on the local rules and laws surrounding foreign buyers. Even if you’re borrowing from a UK lender, they will often have different maximum LTVs for different countries.
Paying an Overseas Mortgage
A major consideration for any mortgage holder is the potential impact of foreign exchange rates on their mortgage costs. To avoid potentially expensive foreign exchange rates most borrowers try to obtain a mortgage in the same currency which they’ll be paying it in; if their income is in sterling it’s well worth choosing a UK bank, whilst if they’ll be earning overseas a foreign bank might be a better choice.
Consider how you’re going to pay back your mortgage; will you be earning sterling, euros, dollars or yen? It’s a good idea to match the repayment currency to your earning currency to avoid exchange rates, if possible. For instance, a pensioner retiring abroad might pay their mortgage with their UK pension - they might therefore choose a UK lender so that they can repay in sterling. However an investor purchasing an overseas home to let out might choose a mortgage from a foreign lender, so they can use the rental income to fund the mortgage without exchanging it for sterling.
Foreign exchange is one of the most volatile markets around, and if there’s one thing you don’t want your mortgage to be it’s volatile. It’s well worth bearing in mind how you’ll be paying your mortgage off, since this will have a major impact on whether you choose to borrow from a UK bank or an overseas lender.
Should you take out a mortgage from a UK bank or an Overseas bank?
Your choice of mortgage provider can have big benefits on the cost of your mortgage, but it’s often hard to decide whether you should choose a UK bank or one in the country where you’re buying a house. Here, we break down some of the reasons why you might choose an overseas bank or a UK-based one.
Borrowing From an Overseas Bank
While it might be daunting to work with a bank that doesn’t speak the same language as you, there are several useful benefits for choosing to mortgage with an overseas bank rather than a UK one. Here are a few reasons why an overseas bank might be the right choice:
Cheaper Interest Rates
In many countries, mortgages are much more affordable than they are in the UK. This is part of the reason why there are so many Brits living abroad, and what has drawn many expats to other countries. Not only is the property itself cheap, but there are many attractive finance options - mortgages can be made available with much lower interest rates and much more favourable terms, such as fixed rate periods for up to 20 years.
Close at Hand
It’s complicated enough managing a mortgage at the best of times, but if your mortgage provider is thousands of miles away it gets even more difficult. With time zone differences and long-distance call costs it can be hard to work with a UK lender if you’re spending a lot of time abroad, and it can be more straightforward simply to work with a lender that’s based near you.
Local Knowledge
A lender that operates almost exclusively within one country will have a deep understanding of its working and how to get the best deals for its customers. When buying a home abroad, the extra knowledge and experience of the local market these lenders can provide often makes the purchase process that much smoother.
Legal Protection
While borrowing from a foreign mortgage provider doesn’t provide any protection from the UK’s regulatory bodies, it does allow homeowners to benefit from the regulatory bodies of the country where they own property. Again, if you’re living and working in a foreign country it can be much more difficult to deal with any organisations in the UK - it’s often more fruitful to work within the local legal framework.
Borrowing From a UK Bank
Taking out a mortgage with a UK lender might well be the right decision. Here we outline a few reasons why it might be more prudent to choose a UK lender rather than an overseas one:
No Language Barrier
Unless you’re extremely familiar with a country’s customs and the language taking out a mortgage with a foreign lender adds a huge level of complexity to your mortgage application. It can be very difficult to make yourself understood and there are many additional complications that can arise - you’ll certainly need an independent interpreter, which adds time and expense to the whole process. Working with a UK lender makes it much easier to understand what’s required of you and lets you get on with the process of completing the mortgage process.
Understanding Your Position
A UK bank will be able to advise you on how to successfully complete the property purchase overseas. You’ll be working with the foreign branch of a UK lender who will understand your position as a newcomer to the country’s real estate market and will be able to highlight the country’s requirements where they differ from the UK’s. If you take out a mortgage with a foreign lender, they may simply assume that you’re familiar with the way the mortgage process works in their country, which can throw up obstacles. The system for purchasing property in France, for instance, places different requirements on the buyer to those of the UK’s system, and if you’re unaware of this it’s possible to miss out vital steps along the way. Working with a lender who understands your position and what you’ll need to know can be priceless.
Regulation & Protection
The UK is one of the biggest financial hubs in the world and plays a major role in global finances. In the wake of the 2008 financial crisis the UK has become one of the best-regulated markets around, and provides many vital guarantees for investors and homeowners. UK citizens benefit from the oversight of the Financial Conduct Authority (FCA) that keeps a close eye on all financial products traded and sold throughout the country, and which pays especially close attention to UK mortgage products. Any mortgage made by a UK lender is subject to the FCA’s strict criteria which entitles borrowers to a high level of protection, as well as recourse to legal options if anything should go wrong.
However, the FCA only regulates UK lenders and loans made within the UK - it has no jurisdiction overseas, and cannot protect UK citizens who take out mortgages with foreign lenders. This means that any foreign real estate purchased with a mortgage from an overseas bank is subject to the regulation of that country’s own financial bodies, which may not provide the same level of protection that the FCA does in the UK. Therefore, UK citizens stand to benefit by using a UK-based bank for their mortgage because they’ll receive the same level of protection that they would when buying a UK property. However, it’s important to check thoroughly that your chosen lender is regulated by the FCA; if you’re taking out a mortgage from a subsidiary of a UK bank, based overseas, they may not be subject to FCA regulation.
Financial History and Records
An important element of any mortgage application is your financial history. Lenders will want to know what sort of person they’re lending to and the best way for them to find this out is by checking your personal financial history. However, financial records are only held and kept domestically - they aren’t available internationally. If you’re buying a house abroad, foreign banks will be unable to access your financial records, which can make it difficult to secure a mortgage - they have no idea what your financial history is like, and will be understandably nervous. While it is possible to provide a certified credit report to these overseas lenders, this is usually not enough evidence to convince them; they’ll most likely seek security in the form of a higher deposit.
If you’re working with a UK lender, though, they’ll be able to access your financial record in full. This gives them much more information to go on, and if your history is good this will make it much easier for you to obtain an overseas mortgage.
Fixing prices/rates
It’s vital for anyone purchasing foreign real estate to keep in mind the impact foreign exchange rates will have on the purchase price of their property. Since you will likely be paying for the property in sterling you’ll need to account for the exchange rate when deciding how much to borrow. You might only need £180,000 to buy a €200,000 home in France today, but if the value of sterling falls you might end up paying more in a month’s time. If your mortgage doesn’t cover this cost you’ll either have to make up the difference yourself or lose out on the purchase, which can prove extremely expensive.
With many real estate purchases taking months to complete this is obviously a big problem for buyers of overseas property. With the value of sterling exposed to constant fluctuation as Brexit negotiation progress, it’s easy for buyers to find the cost of their new home abroad changing from day to day. In order to counteract this most lenders will enable buyers to “fix” an interest rate well in advance of their completion date, sometimes up to 12 months ahead. This gives the buyer a price they can rely on, meaning they won’t be stung with a higher price when it comes to completing their transaction. The only drawback to this is that if the exchange rate fluctuates in your favour, you could be losing out on a better deal - however, the security of knowing your mortgage will cover your costs is usually worth it.
Buying Foreign Property with an Overseas Mortgage
When finding a lender to provide a mortgage for your overseas real estate purchase you’ll need to take into account a few other important elements. Whether you’re using a UK or a local lender for your mortgage there’s still a great deal of work to be done to secure the property itself. You’ll certainly need an English-speaking lawyer or solicitor to work on your behalf, and you will need to check that they’re qualified to work in the country where you’re buying a property. It’s always a good idea to find an independent lawyer; estate agents and banks often recommend lawyers to you but they may not offer you the best advice. Instead, look to find a solicitor who you can trust to work on your behalf to secure the property for you.
You will also need to thoroughly research the process for foreigners buying property in whichever country you’re purchasing real estate in, as many governments impose additional expenses on foreign buyers. These fees can be exceptionally expensive, with France having notoriously high charges for foreign buyers of French real estate - all countries have their own rules, though, so be sure to investigate what costs you’ll be liable for.
When completing the purchase, you should never sign a contract that you don’t understand, or which has been translated by someone you don’t know. You should always be certain to get paperwork translated by an independent specialist in order to ensure that it says what you think it says; this doesn’t necessarily mean that the seller will be acting in bad faith, but one poorly translated phrase or misunderstood sentence can make a huge difference to a contract’s meaning. It’s always worth the time and expense of hiring a professional, independent translator of your own.
Securing Foreign Property with an Overseas Mortgage
As we’ve seen in this guide, buyers can stand to benefit when choosing who they decide to source a mortgage from - there are good reasons to choose a UK lender, just as there are reasons to take out a mortgage from an overseas bank. Whether you’re looking to buy a fresh home for a fresh start, an investment home to let out during the year, or a sunny place to spend your retirement, be sure to fully understand the range of choices you have when deciding how to finance your purchase.
Article by Falbros.