Eurozone banks are turning their noses up at British borrowers, tightening lending criteria and frustrating the hopes of those looking for their dream holiday home. International broker Athena Mortgages says that the number of French mortgages falling through is particularly high, with the banks finding any number of reasons to reject an application.
French banks are getting nervous about lending to foreigners and have started to withdraw funding for typically non-domestic finance including interest-only mortgages, new-builds and investment properties. Big changes have already taken place with leading French lender BNP Paribas slashing the term on its interest-only loans to non-residents from 20 years down to seven years.
"It was quite a big move and they also reduced the loan-to-value (LTV) from 80 per cent to 75 per cent," says John Busby from Athena. "We have seen a few other banks shifting their criteria and making it all a little bit tougher. Money is harder to come by for the banks, and some have had exposure in Greece and Italy so things have definitely tightened and they are less willing to lend."
Things could get even tougher as new rules are introduced over the next two years which will mean rental income from other properties could be discounted and the amount borrowed must be based solely on a borrower's salary, with the total borrowed at no more than six times their overall income.
In easier times, many European banks were more flexible when assessing how much to lend to foreign buyers. For borrowers with a large buy-to-let portfolio, some banks are now changing the way they consider rental income. So instead of taking 75 to 80 per cent of that income and adding it to the overall pot to make their affordability assessment, they might be allowing as little as 25 per cent to be used now.
"Previously there was more flexibility and banks would be a bit more understanding when looking at different aspects of an application, for example, self-employment and rental income," says Mr Busby.
Applications are also increasingly subject to inspection from a committee. This means that providers are sometimes pulling out at the last minute, leaving homeowners in a panic trying to find new mortgage finance before it is too late. It used to be that many brokers were working directly with the underwriters, but some banks are now having every application checked by this second underwriting team that essentially has all the power.
Buyers looking at other popular holiday destinations could find even bigger hurdles to clear, according to Miranda John, the international manager at Savills Private Finance. She says that lending has changed far less in France and Switzerland where you can at least still find the high LTVs that were available in the past.
"All banks are looking closely at lending and non-residents are always more of a risk to a bank, but in context France is in relatively good shape," she says. "Spain, Portugal and Italy are much more difficult markets and there are fewer lenders interested in the non-resident business compared with even this time last year. The countries now trickiest to deal with in terms of finance are those in the press with well-documented difficulties with their economies – Greece, Ireland, Portugal and now increasingly Italy and Spain."
Problems for British buyers include more stringent affordability calculations, higher deposit demands, often a higher interest rate than they might expect due to recent increases in margins and fewer lenders active in the non-resident market. With so much negative commentary about the economies in these countries, Ms John says that margins are in a state of flux; in Portugal a few years ago you could expect to pay an average margin of 1.15 per cent, but after unprecedented market conditions over the past months it has jumped from 2.25 to 4 per cent.
In Spain, LTVs have already dropped off with only one lender, Sol Bank, providing 70 per cent and the rest 65 per cent or below, but again the biggest change in past few months has also been increasing margins. After so many repossessions, the Spanish banks now own a lot of properties that they need to get off their books so this is where the best rates can be found. However, foreign buyers will not necessarily be welcomed with open arms.
"Where bank stock is being purchased clients can expect higher LTVs, better rates and more flexible underwriting but not every advert that says 100 per cent means this is available to non-residents," says Heather Chambers of Spanish broker International Mortgages Solutions. "The banks are far more prudent with non-residents buying bank stock than residents."
Even some of the wealthiest British buyers attracted by Spanish property are at risk of being turned down simply because they have less than straightforward finances. The banks are no longer willing to consider things such as income available but not drawn on personal tax returns, dividend incomes and performance pay or bonuses. "The problem now is that Spanish bank underwriting has regressed to tick-box assessment with no ability for a risk manager to make sensible judgements about what an application tells them in totality about affordability. They are often precluding from borrowing the very people they should be lending to," says Ms Chambers.
With so many potential hurdles to contend with, getting a good mortgage deal overseas takes a great deal of effort. The earlier buyers can start investigating their mortgage options the better, and specialist brokers should help to get the most competitive deal. A good broker will work with a range of lenders and will know the right one to approach with any given application.
To keep the momentum going, buyers should ensure they qualify for life assurance beforehand and sign and return all documents as quickly as possible so there is less chance of criteria changes or rate increases scuppering the application. Buyers also need to understand fully how the mortgage works and be aware of any legal responsibilities, local taxes and other fees associated with a purchase abroad, so legal advice is a must.
Currency is another consideration and a specialist foreign currency provider could make a huge difference; recent figures show that shopping around is vital with the highest return on a £125,000 transfer at ¤139,650 offered by Currencies.co.uk, compared with the lowest of ¤131,062.50 by HSBC.Reuse content