Gone are the days when most buyers would buy their overseas home with ready cash. An increasing number of people are now turning to mortgages to finance their international property purchases, and the options at their disposal have grown dramatically. ?Often people choose to raise a mortgage for tax reasons, or because interest rates are cheap and they are better off borrowing [to buy a house] and investing their spare cash elsewhere,? explains Sean Adams, international finance manager at Savills Private Finance (0870 900 7762).
But the truth is that borrowing to buy a foreign property has also become much easier, especially within the euro zone. ?People [who buy in Europe] have four options. If they have cash, they can buy outright. Others will remortgage their home in the UK and use the cash to buy abroad. A third option is to remortgage in the UK just for the deposit, and take a euro mortgage for the rest. Or they can take only a euro mortgage,? says Suzanne Clay of Barclays Bank (0845 675 5544). Both Miss Clay and Mr Adams stress that no option is better than another in absolute terms. Each has advantages and disadvantages and ?as to what is going to be best, it is very much specific to the client,? Mr Adams says.
Since interest rates in euroland are much lower than in the UK, about two out of every three international property buyers opt for a euro mortgage. ?In France, we offer 2.5% for the first year then more in the region of 3 to 3.5% for variable,? Miss Clay says. ?And whereas in the UK you can usually fix five years maximum, in countries such as France and Italy you can have a fixed long-term mortgage.?
Another advantage of taking a mortgage in euros is that you can avoid the exchange-rate fluctuations. This is especially appealing for those buying to let because they can use their rental income to pay off their mortgage in the same currency. ?You can see the debt reducing and know exactly how much you have left to pay and see the capital appreciation,? Miss Clay says.
Borrowing in euros has also become easier in that prospective borrowers no longer have to negotiate (in broken French or Italian) under rules they barely understand , because there is now an army of people who will do the leg-work for them. Savills Private Finance, for example, tries to get a mortgage agreement in principle from foreign banks and helps customers fill in the forms. ?We speak English, which is why most people use a broker.?
Buyers can also turn to the increasing number of UK banks that offer euro mortgages through their international branches or associates. ?We can offer variable, fixed, capped and offset across Spain, Portugal, France and Italy,? Miss Clay says. ?But we also have staff who can hold clients? hands through the whole process.?
A euro mortgage, however, is not for everyone. Application fees abroad are often more expensive than their British equivalents and lending criteria can be rigid. ?In Spain, for example, their criteria are much harsher,? Mr Adams explains. ?Older people, or people who have a low income but a lot of assets would be better off getting a mortgage in the UK.?
Outside the euro-zone, a number of other country-specific variables come into play. ?In the US, especially in parts of Florida, the mortgage market is very similar to that in the UK,? says Mr Adams, who adds that the choice between a dollar mortgage and a pound one, in this case, is down to personal preference. In the Caribbean, by contrast, a small number of lenders own the mortgage market, which means it may be costly for UK buyers to borrow in, say, Bahamas or Barbados. ?It may be more advisable to borrow in the UK. But in some cases, you may be better off borrowing in the Caribbean even if you pay a little bit more?for example if you are buying to invest,? Mr Adams says.
He also reveals that it is possible to borrow money in euros or dollars against a UK property. ?It means you get money in the currency you are buying your house in. However, he warns: ?You have to have an understanding of the currency risk because you are borrowing in euros or dollars against a sterling asset.?