Don't let your holiday-home plans come tumbling down

Hundreds of holidaymakers return home with dreams of buying a property abroad. Kevin Rose investigates the perils and pitfalls of doing so
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The Independent Online

Holidaying Britons returning home with dreams of buying a property abroad could be risking thousands of pounds by failing to do their homework. Many of us have returned from a summer break dreaming about buying a home in the place that provided that all-important escape from reality. Perhaps we think we'd retreat there again; perhaps we imagine making some extra cash from charging other holidaymakers for the use of it when we are not there.

But there are more factors to consider than you would imagine before this dream can come true. Without thorough research and the right information at your disposal, you could soon regret ever considering buying abroad. We've called on a panel of experts to explain key issues to bear in mind when buying a home overseas.

Use your head

It's vital that would-be buyers think through the idea thoroughly before taking any action, says Louise Reynolds, who runs the independent property agency Property Venture, based in Weybridge, Surrey. "Generally, people can come to such a big decision while they are still in holiday mode and not always think things through properly. Some, for example, may have set their heart on a rural, peaceful setting, but then when they decide they want some income from the property and decide to let it out, their choice of remote location might not be the holiday renter's dream and it might end up difficult to let. So it is best to try to think things through up front."

Know your location

Spending two weeks relaxing in a hitherto unfamiliar location does not represent the exhaustive investigation necessary to make an informed decision about the area; it's time to gain some real knowledge.

Clare Nessling, operations director of the overseas mortgage broker Conti, says the first thing to do is to conduct thorough research about local facilities and transport.

"People gravitate to locations with a nearby airport, especially if it is served by a budget airline," she explains. "But remember there are no guarantees that cheap flights will continue indefinitely in one location. Proximity to basic facilities such as restaurants, shops and a beach are also important.

"Talk to people who already live in or own property in the area you like, to get a better understanding of what it's like to live there. And consider the property off-season. Many beach and ski resorts are seasonal and practically shut down when the tourists return home."

Your judgment of an area should also be influenced by what you intend to do with any potential property, according to Stuart Law, chief executive of the international property investment firm Assetz.

"If someone is purchasing a holiday home just for personal use, then this should be in an area that they know well, love and enjoy," he says. "Investors looking for a holiday home that they can use, as well as generate an income from, need a location that produces the strong rental income over a long season, as well as being in a good location."

Check out the developer

If you are considering investing in a development, whether completed or "off-plan" before the property has been built, it is important to establish that the developer is properly financed.

Louise Reynolds says it is vital to be wary of start-up developers. "Without a track record, it is difficult to know that they are who they claim to be, that the property is theirs to sell, or even that they will finish the property to the standards that you expect," she says.

"This has been an issue in Spain for lots of buyers of off-plan property. They have parted with deposits only to find that a developer has folded, as a result of the global economic crisis, before completing on the property."

As part of the buying process in Spain, it is a legal requirement to have an insurance policy or a bank guarantee for a deposit on an off-plan property. This is designed to protect the off-plan buyer and the deposits paid.

"It is the responsibility of banks to ensure deposit amounts need to be placed in special accounts, separate from any other kind of funds belonging to the developer or promoter," explains Ms Reynolds. "It is in effect a developer's Escrow account, controlled by the bank. So make sure you have a bank guarantee."

Get proper legal advice

It goes without saying that anyone serious about buying a home abroad needs to consult a lawyer, but you must do your research. "Seek specialist counsel from an independent English-speaking solicitor who is not connected to your seller, estate agent or developer," advises Clare Nessling. "If required, you can also consult valuers, surveyors or architects. They should be proficient in your chosen country's laws and processes, and know the specifics involved in buying a property there. It is essential that they confirm to you that all required permissions, licences and planning consents have been obtained."

One of the biggest advantages of taking out an overseas mortgage is that the lender does its own checks on the property, ensuring that a proper legal title exists, that the property is registered in the buyer's name, and that a valuation of the property takes place. That said, Ms Reynolds recommends getting your lawyer to double-check that you are buying a property with the correct title, and that you are being registered as the official owner. "There are cases in Cyprus where buyers have found it can take a long while to get their ownership registered properly, and this can leave buyers vulnerable," she warns.

But there are ways to reduce the risk of title deeds taking a while to be registered in the buyer's name, Ms Reynolds adds. "For example, ensure that your legal adviser conducts a full search at a land registry office to make sure the title is clean and that no existing mortgages exist on the property or land. This will also disclose if any other previous contract of sale has been lodged." Another reason not to use the developer's own lawyer is that it could be in the developer's interest to delay the whole registration process, she adds.

Paying for it

People often assume that buying a property abroad will be similar to buying one in the UK, including the mortgage deal. But while the front-end loan administration may be similar, this is only the start of what can be a lengthy and complicated process if not managed properly.

"Each country presents a myriad of eligibility criteria, regulations, administration requirements and language barriers," says Clare Nessling. "It is crucial that the right advice is sought and that you don't let your heart rule your head. The principles you would stick to in the UK also apply when buying overseas, and you certainly shouldn't try to cut corners."

Katy Hepworth, of Assetz, says potential borrowers should apply early for finance and prepare for a long wait. "Overseas mortgage lenders do not use online application systems like UK lenders – everything is paper-based," she explains. "It takes time to process it all, so don't apply for finance at the last minute."

Overseas lenders generally do not offer "non-status" mortgages. They require proof of income, typically over three years, and missing paperwork will slow down the application. Make sure you remember everything on the checklist from the start.

Ms Hepworth recommends asking about a long-term fixed-rate mortgage when making an application. Some overseas lenders offer deals with competitive rates fixed for the entire term, which will enable a borrower to establish their outlay for the duration of their mortgage.

Gaining approval

Claire Nessling suggests obtaining an "agreement in principle" for your mortgage before agreeing to buy a property, signing contracts or paying a deposit. "This will tell you exactly how much you can borrow and what price range you can realistically consider when conducting your property search," she says. "It will put you in a much better position with agents and developers, proving to them that that you are a serious buyer, and you will be better placed to negotiate price. It is tangible evidence that you can take along when house-hunting. It can also lead to your application being fast-tracked once you've chosen your property."

Watch out for extra costs

Just like buying a home in Britain, there can be a host of other costs to factor in, on top of the asking price. Legal fees, local and national taxes and insurance must all be met in the host country and can often add at least 10 per cent to purchase price.

"There is a cost of registering the mortgage charge at the land registry office in a lot of overseas countries that is borne by the borrower, so make sure you know how much this is," advises Ms Hepworth. "Some lenders also require borrowers to accept a life insurance policy to cover the loan, which again is an extra cost per month. On the flip side, in some countries banks bear the cost of the valuation that the borrower doesn't have to. Always check what exact costs you will have to pay."

The tax factor

There are a number of tax implications for Britons buying a property abroad. A form of Capital Gains Tax (CGT) will apply when eventually selling the property, presuming it has grown in value.

Also bear in mind that any rental income is likely to be subject to tax. Where the tax is due depends on the location of the property.

Do your research on double tax treaties, which mean that you only pay tax in one jurisdiction. "Double tax treaties exist with virtually all counties in Europe for income tax, CGT and corporation tax," says Brian Murphy, a financial planning manager at AXA Wealth. "However, there are very few that cover inheritance tax."

The inheritance situation is very different in France, which is popular location for Britons with second homes, explains Murphy. "When you die, you have so-called 'forced heirship'. It is an old Napoleonic Code law, which means that you do not have total freedom in your will; certain people will get prescribed amounts, and only what is left can be distributed freely."

If you die and are survived by one child, for example, you cannot give away more than 50 per cent of your estate in your will. If you have two children you can only give away one-third.

Nor is all this set in stone. Laws change, often on the back of (real or invented) anti-foreign property owning sentiment. French MPs recently discussed taxing non-French home owners more, although the idea looks unlikely to become law. So, even after you have bought a property, keep abreast of the local laws to avoid being caught out.

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