Costs of continental living

A second home abroad will remain a distant dream if you fail to secure the right funding, says Stephen Pritchard
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The Independent Online

Pleasant climates and property prices lower than in the UK makes buying a second home in continental Europe attractive to a growing number of Britons. But unless a buyer can pay cash, raising funds can make it that much harder to turn the dream into reality.

Pleasant climates and property prices lower than in the UK makes buying a second home in continental Europe attractive to a growing number of Britons. But unless a buyer can pay cash, raising funds can make it that much harder to turn the dream into reality.

For a start, higher property taxes and legal fees can make the actual cost of buying substantially greater than in the UK. Buyers also need to allow for ongoing costs, like local taxes. In addition, countries like France have very different inheritance tax regimes which can be a pitfall for UK residents who do not take proper advice before buying; some UK families have been forced to sell their overseas homes to comply with local inheritance laws.

Fortunately, with good advice and careful planning, most of these issues can be resolved. But buyers who do not organise their financing in good time can hit real trouble on the Continent, especially as purchases become binding at an earlier stage than in England and Wales. The French compromis de vente, for example, is binding as soon as a buyer's offer is accepted, and means putting down a 10 per cent deposit.

HSBC, which sells mortgages in France in partnership with local bank CCF, warns that UK buyers often misunderstand the differences between buying systems at home and those in France. In England and Wales - Scotland has different rules - offers are not binding until the exchange of contracts and there is plenty of scope for a buyer to pull out whether because of a lack of funds or because of a simple change of mind.

In France, the compromis de vente is binding even if finances fall through, unless the buyer makes the deal conditional on a mortgage; this is known as conditions suspensives. French contract law does, however, allow for a seven-day cooling-off period.

Such differences in local practice make it essential that buyers arrange their funds early, possibly even before they start looking for property. For buyers who need a mortgage, there are two main ways to raise funds: through a mortgage secured on a property in the UK, and through a mortgage secured on the overseas property, usually in the local currency.

Remortgaging has increased in popularity as UK property prices have risen, allowing home owners here to release equity from their homes. As long as the buyer has enough income to justify the larger loan, there are usually few problems. Banks here may not even want to know why a borrower wants the extra funds.

However, releasing equity is neither the only, nor always the best, approach. One pitfall is that if a buyer were to find he or she could no longer afford the higher mortgage, their UK home would be at risk. It might not be possible to raise funds quickly by selling the overseas home. Mike Boles, a director at Savills Private Finance the mortgage brokers, says there are also tax and currency issues to consider.

Although raising funds in the UK against a UK property, and then converting that to euros is relatively risk-free, a mortgage in pounds secured on a property valued in euros or another currency is more complex.

A sterling mortgage has the advantage that repayments will not fluctuate with currency movements, but the ratio between the debt and the equity in the property will vary. This can cause problems for owners when they need to sell, as they will not be able to be sure how much the sale will raise, once the proceeds are converted back to pounds.

Boles also says that buyers who take out a euro mortgage will find it easier to offset interest costs against any rental income or, where appropriate, local wealth taxes. Keeping everything in the local currency also makes it easier to budget for maintenance and repairs.

Euro-zone interest rates also look attractive, especially when set against rising rates in the UK. Variable rate mortgages in the euro-zone can be as low as 3 per cent, although rates in popular non-euro destinations, such as Cyprus, are higher. "Interest rates for euro mortgages are low and do not look to be going up," says Boles.

Even so, buyers who want to head to Europe will need to do their homework. Mortgage brokers like Savills can organise local financing, but typically will only take on loans of a minimum of €100,000 (£66,000). Normally a Savills client will buy a property worth half the value of the UK home.

Boles, though, cautions that euro-zone lenders can be more conservative than in the UK. A higher deposit is almost always a requirement, and lenders will pay more attention to personal earnings and give less weight to rental income than buy-to-let lenders here. Researching the market early is the only sure way to make sure finances do not turn the dream sour.

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