Financing foreign forays

A cash lump sum avoids currency swings - raising it is another matter
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The Independent Online

Buying a home overseas is an enticing prospect, and Britons are increasingly adventurous with their choices. Destinations such as the US, Mexico, Croatia and Australia have joined the more common choices of Spain and France.

Buying a home overseas is an enticing prospect, and Britons are increasingly adventurous with their choices. Destinations such as the US, Mexico, Croatia and Australia have joined the more common choices of Spain and France.

The financial services industry, though, has yet to cast its net so wide. The majority of UK buyers still look for properties in the euro zone. But when it comes to saving for a deposit, there are only a handful of banks offering euro accounts, according to Moneyfacts, the financial research service.

Of the big names, Citibank and NatWest offer deposit accounts in currencies including the euro and the dollar. These accounts are worth investigating: saving a deposit in the local currency cuts out the exchange rate risk. Moving money monthly into a foreign currency account evens out the fluctuations of the currency market, even though commission charges are usually higher on smaller, regular payments than on larger lump sums.

But although it pays to save for a deposit in the currency which you will need to purchase a property, arranging a foreign currency mortgage is a less popular option. A number of lenders including Abbey and Barclays will arrange mortgages in currencies such as the euro. Usually, however, buyers are advised to take out a sterling loan, unless they have earnings in the local currency or hope to finance the property from (local) rental income.

Although buying a house priced in, say, euros with a euro mortgage looks an attractive option, in reality it leaves the buyer exposed to currency risks if they have to use income in sterling to cover the monthly mortgage payments.

"To minimise risk when financing an overseas purchase, the loan should be in the same currency as the currency of the country where the property is located," says Ray Boulger, senior technical manager of mortgages at broker Charcol. "If the borrower has rental or other income in that currency, that is an addition reason to borrow in the local currency, but a much less important one.

"The rationale for this is exactly the same as that for not borrowing in a foreign currency to buy a UK property. Most people buying a property overseas do so because they have decided they want a property in that location, not as a way of speculating in the foreign currency markets."

As the difference between currencies can differ by 10 per cent or more over the course of a year, the danger is very real. If buyers do opt for a foreign currency mortgage, they will have to put down a higher deposit than is normally the case for a sterling loan. This reflects the additional risks involved.

The safest way to fund an overseas purchase is with a cash lump sum, ideally converting the funds early on in the buying process to minimise currency exposure.

Buyers leaving the UK for good may well be able to achieve this through selling their property here. With house prices higher in the UK than France, Spain or even much of the US and Australia, remortgaging to release equity is another popular option. This can work for home owners buying a second property abroad, as well as those moving overseas who opt to rent out their home in the UK.

Remortgaging a UK property should also be the cheapest way to fund an overseas property purchase, at least for buyers who can't borrow in the local currency and take advantage of lower euro or dollar interest rates.

Lenders that do handle second home purchases with a mortgage secured on the overseas home rather than a UK property typically charge a premium over normal UK lending rates. Anyone remortgaging, though, will probably not even have to tell their lender why they want the extra money. This will be the case as long as they stay within the lender's normal limits for salary multiple and the loan-to-value ratio on the property itself.

If remortgaging is not an option, lenders such as HSBC, Woolwich, Norwich & Peterborough Building Society, Newcastle Building Society and Royal Bank of Scotland International lend on homes abroad.

Not every lender will arrange a loan in every country or all currencies, however. HSBC lends only in France and in euros, through its partnership with French bank CCF. Norwich & Peterborough Building Society lends in southern Spain and Gibraltar; Newcastle Building Society lends only in Gibraltar. Both lend in sterling. RBS International lends all over Spain, in euros or sterling; Woolwich lends in Spain, Portugal, France and Italy, but only in euros.

For borrowing further afield or in more exotic currencies, the best option might be to approach an overseas lending specialist, such as Conti Financial Services. The company recently launched a mortgage for Britons looking to buy property in Bulgaria, an increasingly popular destination.

Loans are available from €40,000 (£28,000) upwards, with an interest rate of approximately 7.5 per cent. Buyers have to pay back loans in 15 years. According to the company, Bulgaria is increasingly attracting interest both from Bulgarian ex-pats and UK nationals heading to work in the country. Conti expects to add other eastern European countries to its lending portfolio over the coming months.

In eastern Europe, as with most overseas property markets, buyers should allow for higher purchase costs than are typical in the UK, as well as contracts that are binding earlier. In France, the buyer will usually have to pay the selling agent's fees. These might not be included in the asking price. Property transaction taxes are higher than in the UK, and buyers also have to pay the notaire, a public official who oversees the transaction.

In the US, buyers and sellers might both have to pay the estate agent, or "realtor", for their services, and up-front mortgage fees are higher than in the UK. And in Spain, complex property law - including controversial legislation in the province of Valencia that can mean home owners lose part of their land to developers, without compensation - mean the services of a good, independent lawyer are vital.

It is also wise to factor in the costs of additional trips to the area to sign contracts and other paperwork. The timing of these visits might not be known far in advance and even the low-cost airlines can charge substantial fares for last-minute bookings.

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