Buying overseas: Pace yourself for the long haul

It pays to plan ahead if you're buying overseas. Stephen Pritchard tells you how

For some holidaymakers, browsing estate agents' windows is as much part of a break as soaking up the sun or touring the cultural attractions of a foreign city. But a growing number of people go further, and put in an offer to buy an overseas property.

Just under a third of Britons are interested in owning a property abroad. A fifth of all remortgages taken out in the UK are in order to fund an overseas property. Often though, would-be buyers do not consider the finances until they have already put down an offer. This can leave buyers struggling with two problems: arranging the right type of mortgage, in the right currency, and transferring what can be a substantial lump sum overseas for the deposit.

In many overseas markets property transactions take significantly longer than in the UK, so any delay in organising the finances could put the purchase at risk. "Usually buyers have not thought about the timescale or the length of the process," says Neil Burns of mortgage brokers Mortgage Maestro. "They might have dealt with lenders in the UK where you can submit an electronic application in minutes. In Spain or Portugal you need to allow 10 to 14 weeks."

Ideally, anyone looking to buy an overseas property should take independent financial advice. Lenders in continental Europe often require substantial deposits: 30 per cent is common. Mortgage terms are usually shorter, too. As a result of the complexities of raising finance abroad, UK home owners buying properties overseas often do so in cash, or by remortgaging their UK property.

Remortgaging here is straightforward enough, at least for buyers who have sufficient equity in their home. But it brings two risks: they could lose their UK property should they fail to meet the new, higher mortgage repayments. And the finance is only available in pounds sterling.

For some buyers, a mortgage in the local currency they are buying in makes sense; in other cases the best way to finance a property could well be in a third currency. Some buyers in Cyprus, for example, are currently arranging mortgages in Swiss francs with Cyprus banks, in order to take advantage of the lower Swiss franc interest rates.

Whether such an approach makes sense, cautions Burns, depends on the buyer's attitude to risk and how flexible their finances are. For someone with a large overseas mortgage and most, if not all, of their income in sterling, a mortgage in euros or another local currency brings with it exposure to fluctuations in the money market.

One area where it does make sense to think in local currency terms is the deposit and any transaction fees. By being prepared to convert money into the purchase currency ahead of time, buyers can increase the chances that exchange rates will work in their favour. The simplest option is to open a savings account with a local bank or a UK or offshore bank that operates foreign currency accounts. Citibank offers its UK customers US dollar and euro savings accounts, and offshore branches of banks such as HSBC and Barclays have similar deals. Unfortunately interest rates, especially on euro savings accounts, are low.

As an alternative, a growing number of overseas property buyers are turning to foreign currency brokers, who can book currency ahead on the money markets, known as a forward contract. Foreign Currency Direct, for example, can reserve funds for up to three months. This has the advantage of fixing the exchange rate, but the funds can stay in a sterling account until the last possible moment.

According to Foreign Currency Direct director Robin Haynes, currency brokers can often achieve a far better rate of exchange than using a bank, especially for larger transactions. The exact savings will depend on how good the property buyer's UK bank is: Haynes expects to save 0.5 to one per cent over a good bank commercial rate, but if the UK bank is only offering "tourist" rates, the saving could be as high as three to four per cent.

"In one case we managed to save a client US$30,000 on a dollar purchase," says Haynes. "That could easily be enough to buy a swimming pool."