Nearly a year on from the Northern Rock affair, the mortgage options for first- timers are more limited than they have been for a generation, as lenders insist on substantial deposits and offer more expensive deals. The conclusion of many experts is that the UK property market will be in a mess for a long time to come.
As a result, reports foreign exchange specialist Moneycorp, nearly 50 per cent of new buyers are now putting their hopes in property abroad.
"As lending criteria tighten, first-timers are turning to foreign shores to live their investment dream," says Moneycorp spokesman Marc Morley-Freer. "Our research shows that more than four in five think their money will go further overseas. That so many buyers are prepared to get their first taste of home ownership in a foreign land speaks volumes for the state of today's domestic market."
Miranda John, foreign property specialist at broker Savills Private Finance International, adds: "With property prices falling faster in the UK than elsewhere in Europe – except for Spain – the Continent may be seen as a safer place to buy because declines are less likely." In short, buying abroad is seen as a defence against falling into negative equity.
It's not just Europe: many first-timers are now looking to the US, and even Australia, to secure what could be a lucrative investment.
While some people buying outside the UK are looking to start a new life abroad, many are letting their new properties out. The hope is that this income, along with a rise in the price, will allow them to build a deposit for a UK home.
So where are overseas house-hunters opting to buy? Moneycorp says Spain is still the number-one choice, even though it has gone through its own property crash in the past couple of years. France is in second place. "These two countries are popular because they are easily accessible from the UK and people have gone there on holiday," says Mr Morley-Freer.
The US ranks third, according to Moneycorp, as Brits look to take advantage of the weak dollar, while Australia and Italy also make it into the top five.
Bur Ms John warns that "the bottom has fallen out of the Spanish market", citing a huge oversupply. "Elsewhere, prices in France remain strong – particularly in the South and the Alps – while in Italy there are some cheaper options in Calabria and Puglia."
And there are some real bargains, she adds, to be found in the US. "Prices have fallen considerably and the exchange rate is very favourable."
Demand is also growing for property in Eastern European countries, according to Paul Plewman from currency specialist Travel- ex. "First-timers who can't get a mortgage on a UK home are picking up more affordable properties in Bulgaria, Hungary and Poland."
All this may sound appealing, but you must do your research before making such a big decision.
"Price increases and rental returns abroad may look good on paper, but buyers need to approach with caution, and particularly if they are relying on rental income to make their investment work," says Mark Bodega from foreign exchange broker HiFX. "Also bear in mind that while you can get a lot more for your money in other parts of the world, cheap is not always best. Think seriously about what you want from the property in terms of capital growth or rental income from letting it as a holiday home, say."
When it comes to financing the purchase, be aware that many UK mortgage providers will not offer loans on properties overseas – often because they regard foreign markets as being too risky.
Abbey, though, offers a euro mortgage for people buying property in Spain. Customers can arrange to open a Spanish bank account for their payments via Abbey's parent com-pany, Santander.
One of the easiest ways of obtaining a mortgage to buy overseas is to use a broker based in the UK but with international expertise. The broker will aim to source the right deal for you – using an overseas lender for the funding.
Arranging the transaction yourself from the UK can be a logistical and linguistic nightmare, since you will have to liaise with a lender in the country where you are buying.
At present, mortgage rates on the Continent are lower than in the UK. And while the credit crunch has hit mainland Europe as well, overseas lenders have always been more cautious anyway. They tend to want bigger deposits – 20 per cent is typical – and have strict affordability criteria.
When sorting out the finance for a new property, ensure the mortgage details are stated in a contract and that you have an "opt-out" if the loan is not agreed, which will ensure any deposit is refunded. Arrange the loan "in principle" before you agree to purchase the property, or before you sign any contracts and hand over your deposit.
Those who opt for a home loan in a foreign currency always run the risk that a major weakening in that currency will increase the cost of their sterling repayments, as well as devaluing their new investment in bricks and mortar.
The currency risk applies equally, says Mr Plewman at Travelex, if you pay for a foreign mortgage in sterling: "This can lead to wide variations in outgoings as the exchange rate fluctuates from month to month.
"To avoid these extra costs, we urge overseas buyers to consider locking into an exchange rate – in a process known as 'forward contracts'."
It's worth making use of the services provided by one of the currency brokers. Generally, the exchange rate will be better than at a high-street bank and you will be offered forward contracts that fix the rate for up to two years in advance so you know exactly how much you are paying each month.
Finally, always consider the fees and costs when buying abroad, and bear in mind that these can vary from country to country. Moneycorp has found that Britons spend more than £19,000 on "hidden costs" because they don't take taxes, legal fees, bank charges and other expen-ses into account.
'We feel we've got a lot more for our money in France'
First-time buyers Oliver Richards and James Nunn, both from London, bought their first property together in France earlier this year because they were worried about the state of the British housing market.
Using overseas mortgage specialist Baydonhill, the pair paid €300,000 (around £240,000) for a ski chalet in the French Alps. To purchase the property, which sleeps six people, they had to put down a 15 per cent deposit.
"We knew there was no way we could afford a place in central London," says Oliver, who works as a strategy consultant and currently rents in Chelsea. "The UK market looks pretty gloomy at the moment and we were concerned about ending up in negative equity."
Oliver and James, a surveyor, now plan to use the property as a holiday home, and also to rent it out to friends and family for rental income.
"We are both keen skiers and chose a place high in the Alps that you can ski right up to," says Oliver. "In an ideal world, we would have bought our first home in the UK, but we just couldn't afford to.
"While we had to put down a large deposit, we feel we have got a lot more for our money in France, and that the place has great potential for growth. We hope we can make a good return on our investment and buy in the UK later."
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