When buying a property overseas often a buyer will need to take out a mortgage to help them fund the purchase, just like they do when buying a property in the UK. What is different when buying a property abroad is that there can be several different options available to you;
1. Mortgage abroad
The most obvious option is to take out a mortgage in the country that you are buying in. You buy a property in Spain and take out a Spanish Mortgage, if you buy a property in Portugal you take out a Portuguese mortgage and so on. This has several advantages;
a. It keeps things very simple and reflects what is actually happening.
b. The mortgage is registered against the property that you are buying. This means that the value of the property is in the same currency as you are paying back. Interest rates are also linked to the economy that you have your property in and therefore as everything is in one economy you are less likely to have things go completely adrift in terms of value of the property, interest rates and so on (unless, of course, there is a collapse in the economy).
c. You are keeping any mortgages used to buy property overseas away from your main home in the UK
Of course if your income is in Sterling and the mortgage payments are in Euros then you will need to not only make sure that there is enough money in your Spanish Bank account to pay for the mortgage every month but also to have in mind you may also be affected by changes in the Currency Exchange rates.
However, the good thing is that you can minimise Currency Fluctuations by using Currency Dealers who can fix the exchange rate for a whole year so at least you know how much your mortgage will cost in terms of the exchange rate. You can read about Currency dealers.
2. A UK mortgage
This doesn’t mean that you can walk into your High Street bank in the UK and, for example, take out a mortgage to buy a property in Spain. We are not aware of any British Banks that will lend against a foreign property. What actually happens is that you release equity from your UK home to give you the money to buy the property abroad.
The advantage of doing this is that the mortgage payments are in the same currency as you earn, meaning that there are no exchange rate losses when it comes to paying the mortgage. However, even in this scenario there can be several disadvantages;
a. This means that the property overseas is free of mortgages but it does mean that your main home in the UK is more exposed if you can’t pay the mortgage.
b. The amount that you borrowed is not linked to the value of the house you bought (i.e. the property abroad) and therefore the two things are much likely to get out of sync in terms of amount left to pay on the mortgage, property value, interest rates and so on.
3. A mortgage in a third currency
This particular option was prevalent in places such as Cyprus over recent years. Originally when a British person purchased a property in Cyprus they were often encouraged to take out a loan in Japanese Yen because of the exchange rate and interest rates. When the Japanese Yen stopped being so attractive the banks switched their attention to Swiss Francs.
The big problem with taking out a mortgage in a different currency is that it is very easy for the interaction between the three currencies to go wrong and to leave you in a financial minefield.
You will have three sets of currencies where exchange rates can vary. You will have three sets of economies to rely on and of course the more countries and currencies involved the more likely that something adverse will happen to one of them; which will affect how much you have to pay back.
Taking out a Japanese Yen or Swiss Franc Mortgage to buy a property in Cyprus always had the capacity to create a problem with so many variants outside of the borrower’s control.
Many people who took out a Swiss Franc Mortgage to buy property in Cyprus now find themselves in the financial position of owing much more to the bank for their mortgage than they did when they first bought the property; and all of this despite having been paying back the mortgage for years.
If you have a Swiss Franc Mortgage for a property in Cyprus you can down load our Swiss Franc Mortgages Brochure.
4. Take over developers mortgage
In some countries it is possible to take over a mortgage that is already on the property. This is most common when buying a property direct from a developer (i.e. an off plan property). The developer will often have a mortgage on the property which allows him to fund the construction.
When the property is finished the buyer will take over (subrogate) the mortgage from the developer with the authority of the bank. Basically the buyer will step into the shoes of the developer as far as the instalments related to the mortgage are concerned.
This is a very convenient way of proceeding – after all, the mortgage is already registered against the property and you simply take it over. However, the mortgage that the developer takes out for a short period of time of a couple of years may be very different from the sort of mortgage that you would want long term.
The terms and conditions associated with the mortgage may therefore not be suitable for you. It is, of course, also important to make sure that the mortgage has been properly segregated as often the mortgage is over the whole plot and you don’t want to end up being responsible for the whole mortgage for all the properties.
If you would like to know more about the mortgages for purchasing a property abroad then you can contact our legal team. Please note that we are solicitors and not mortgage brokers. We cannot therefore advise you as to the best mortgage to take but can put you in contact with reputable specialist international mortgage brokers who can assist you with obtaining your mortgage. We do not receive any commission for putting you in contact with the mortgage broker and do so simply because they have given good service in the past.
Disclaimer – International legal issues are a complex area of law and this information is no substitute for independent legal advice on an individual basis taking into consideration your personal circumstances and legal requirements. This information is provided to provide general information only and was correct at the time of publishing. The legal position in relation to international transactions can change frequently and this page may not have been updated following any changes in the law. You should therefore not rely on this information and should seek legal advice in relation to your personal circumstances.