Cash buyer or not, it’s always worth exploring possible mortgage options when you buy property abroad. You never know, you might be surprised by the deal you could get. Here are some key pointers to get you started.
Currency considerations
Think carefully about how you will service your foreign mortgage. Ideally, you’ll have a source of income in the same currency as the mortgage to cover the repayments. Typically, second homeowners will generate this from rentals, either short-term holiday lets or long-term lets.
Making repayments in a different currency to a mortgage could leave you exposed to fluctuating exchange rates – ie your monthly repayment might be fixed in euros but the sterling value will fluctuate. If you do choose this route, plan carefully how you make monthly payments – speak to Smart Currency Exchange about this and the benefits of fixing an exchange rate for future mortgage payments.
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Hedge against a poor FX rate
While sterling remains historically weak, buying with a foreign currency mortgage makes financial sense for many UK buyers. Instead of exposing the full value of your overseas property purchase to a poor exchange rate, consider taking advantage of a euro or dollar mortgage deal.
In the Eurozone, banks are offering more competitive rates than in the UK, making property finance even more attractive. Most euro mortgages are pegged to the 12-month Euribor rate, which is currently at 4.2 per cent (Oct 2023), which compares favourably to the Bank of England base rate of 5.25 per cent. Just check your deal includes minimal redemption penalties, in case you’re in a position to pay off your mortgage if the exchange rate swings back in sterling’s favour.
Top-up mortgages
Often a comparatively small mortgage can make a big difference to the property you can afford. Topping up a €300,000 cash budget with a €150,000 mortgage, for example, can increase your buying power and open up a wider choice of property in more sought-after areas to you. And because your loan-to-value is low, they should be fairly easy to obtain.
Homes perched on top of coins
Use a broker
Unless you have exceptional contacts at a foreign lender or bank, always use an independent bi-lingual broker to get a mortgage. The benefits offered by brokers include:
- They know the local mortgage market and how to navigate it.
- They get your application right and ensure all required documentation is provided.
- They’ll offer an extra layer of one-to-one support throughout the purchase process.
- They’ll secure you an agreement in principle as soon as possible.
- They have relationships with a wide range of banks, enabling them to cherry pick the best products according to your economic profile; most can get you exclusive deals, which you wouldn’t get if you went direct to the lender.
- They will negotiate the best deal on your behalf, including discounts on the headline rate or negotiating flexibility on the other products you might be expected to take with the lender.
The power of pre-approval!
Getting approved for a mortgage is highly recommended and something your broker should make a priority. It means a lender is willing to offer you a mortgage deal and provide written proof in the form of an agreement in principle (AIP), also known as an approval in principle or mortgage in principle.
Being able to produce an AIP shows estate agents and vendors you are a serious buyer ready to make an offer and act fast. It increases your buying power compared to another buyer yet to get approved for a mortgage.
Understand eligibility
Forget income multiples and be prepared for a different application process to the UK. A key difference is that foreign banks typically focus on debt-to-income ratio (DTIR) and residual income when assessing applicants’ eligibility. For example, DTIR of more than 33 per cent could be too high, so you need to prove you have at least two-thirds of your monthly income left after all regular repayment obligations, such as credit cards, debts or existing mortgages.
In terms of loan-to-value (LTV), 70 per cent is fairly typical as the maximum available to non-resident buyers, and 80 per cent is attainable in some circumstances.
Doing the sums
Understand what value your mortgage will be based on and what cash you will need to put down to complete your purchase. Two key points to consider here. If the lender’s valuation, which will determine the mortgage value, is less than the agreed purchase price – which is not uncommon in some markets – you could need to put down a larger deposit than you first thought. And valuations do not include those buying costs needed to complete a purchase, such as taxes and fees.
In Spain, for example, these can amount to 10 per cent of the agreed purchase price, which in this instance means the total deposit needed to buy with a 70 per cent LTV mortgage is 40 per cent.
Benefit from currency experts
Along with your mortgage broker, make use of the expertise available from Smart Currency Exchange. Chances are your overseas property purchase, with or without a mortgage, will require you to transfer sterling funds from the UK to a foreign currency account.
Smart Currency Exchange will discuss your requirements and take care of all your currency transfer requirements while offering competitive exchange rates and solutions for minimising your exposure to exchange rate movement.
