Mortgage Clinic: In some areas, options for borrowing are limited
Wednesday, 2 July 2008
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I want to buy an investment property overseas. Should I release equity in my UK home, and where should I shop for a mortgage – in the UK or abroad? AD, by e-mail
The majority of UK buyers overseas have indeed tended to fund their purchases by releasing equity from their UK properties. In today's market, whether or not this is best for you depends on how much you need to release.
The current credit crunch has not stopped most UK lenders taking a fairly relaxed approach to borrowers remortgaging and getting their hands on some equity. Some lenders still allow their borrowers to take out up to 90 per cent of their home's value if they can afford the higher repayments.
You must always bear in mind, however, that financing an investment property abroad in this way means that, if you fall on hard times and can't meet the larger monthly repayments, you could risk losing your UK home.
The other danger inherent in taking out large amounts of equity from your UK home is negative equity. Having taken out the cash value locked in your home, should house prices continue to fall, your new larger mortgage could actually be worth more than the value of your home.
This is not a problem should you end up selling, if or when prices recover, but it will be an issue if you plan to move on from your current UK home any time soon.
Whether or not releasing cash is your best option also depends on where you plan to buy. In some areas your options for borrowing could be limited, leaving you cash reliant.
For example, you would be hard-pressed to find many UK lenders happy to finance property purchases in North Cyprus, and while some Turkish banks have started lending in the region, you might only be able to borrow 50 per cent of the value of a property.
In up-and-coming tropical hot spot Cape Verde cash has also been king for most buyers as it's only possible to get a mortgage on property that has already been built, not on the many off-plan new build opportunities springing up on the islands.
However, buyers could have more options in the near future. "Banks on the island are poised to start lending on new properties as confidence in the market builds," says Paul Collins of overseas buyers' guide website www.buyassociation.co.uk.
In other areas, such as Dubai, mortgages might be available, for example through international banks like Barclays, but you might only be allowed to borrow up to 80 per cent of the value of your property. The red tape involved with getting a mortgage to buy in the country may also steer some buyers back to the cash route.
In any country, being a cash buyer means you avoid shelling-out for things like mortgage arrangement fees and mortgage interest on your overseas property, but also means you miss out on the checks and balances of having a lender assess whether your home would be worthy of lending on.
This makes seeking independent legal advice on your property purchase and undertaking full local searches and surveys even more vital for cash buyers.
These days you can arrange a mortgage in the UK to finance purchases all over the world, either through lenders with international lending operations such as Barclays and Abbey, or UK mortgage advisers such as Conti Financial Services (www.mortgagesoverseas.com) who can help buyers arrange a mortgage in 45 countries across the globe.
If you plan to rent your property to tenants or holidaymakers, then it could be best to borrow in the same currency as that income is paid to you, to avoid the cost and complications associated with transferring money between currencies.
You might also be swayed into getting a mortgage in the local currency if lending rates are lower in the local market. If so, it is vital to do your homework on the outlook for sterling against that country's currency. Also, consider what you'd do if you struggled to find tenants and you had to pay your mortgage from your own income.
"If you are paid in sterling but have a mortgage in the local currency you might be vulnerable not only to rises in mortgage rates in that country, but also to sterling fairing poorly against the local currency, such as the situation with the pound and the euro today. This can really hurt," warns Richard Morea, technical manager at UK independent mortgage broker London & Country Mortgages (www.lcplc.co.uk).
In other words, you could find yourself having to shovel cash into your foreign mortgage to keep pace with the vagaries of the currency markets, even if the local lending rates are lower than the UK and hold steady.
