Buying a property abroad may seem like a great way to make money out of the property market and, in many cases, it is. However, working out the best way to finance this investment can cause more than a few headaches and getting it wrong could cost you dearly.

Mortgages abroad

More and more Britons are looking to purchase properties abroad, either as holiday homes, or more commonly, as a way of investing in potential growth areas. With European Union rules allowing its citizens to purchase property freely within other countries of the Union, it is little wonder that the demand for foreign property has soared recently.

When it comes to financing a potential purchase, there are several things that a potential purchaser needs to consider carefully if they are to obtain the most cost-effective option for themselves as individuals.

Raising Equity from a Current Property

House prices in Britain have risen substantially, in recent years, meaning that most homeowners have the option of re-mortgaging to raise finance for a foreign purchase. According to the large banking institutions, this remains the most popular option for overseas investors. Anyone considering this option should be careful to consider all of the issues involved in re-mortgaging. Any finance that is received in this way is secured on the UK property, which, in most cases, is likely to be the primary place of residence. If for any reason, the repayments are not made, then the property in danger of repossession is the main residence and not the property abroad.

One of the benefits of this type of financing option is when an off-plan property is being purchased. With off-plan schemes, it is common practice for the developer to require stage payments before the building is complete. At this stage, it would be virtually impossible to obtain any financing using the partly built property as security for the loan. If the funding is being received from releasing equity in another property, these stage payments can be met with relative ease, as the incomplete state of the overseas property will not concern the bank or building society.

International Mortgage

If the thought of securing your overseas investment on your UK home seems to be a little too much to bear, then an international lender may be a better option. International lenders, as the name suggests, deal with a variety of countries and generally have local expertise enabling them to deal with all the negotiations as well as the legal processes and any necessary paperwork. This is a wonderful hassle-free option for an investor, however, their fees tend to be considerably higher than a local lender because of the range of services that they offer.

Some UK high street banks offer international mortgages, for example, HSBC offers French mortgages and Lloyds TSB offers Spanish mortgages.

Using a Local Mortgage Provider

Using a local lender may seem like a good idea if you do not want the extra costs of an international lender and you also do not want to use your UK residence as security.

A local lender can act quickly and can ensure that the property is worth what you are paying for it, in a similar way to how a mortgage provider in the UK would behave. They complete all of the necessary searches, surveys and paperwork. Another advantage is that you will be borrowing in the local currency, so there will be no additional incurred costs from transferring cash from the UK to the country in which you are purchasing the property.

Having said this, fees and interest rates may not be as favourable as those in the UK and you may find that the monthly cost on a similar sized mortgage could be substantially more. As you would be borrowing in the local currency you are, in effect, gambling on two separate markets, the property market and the currency exchange market, so you could gain or lose from fluctuations in either. Another potential issue can be that it is difficult to prove income to the satisfaction of a foreign lender and, therefore, you may find that you are limited in the amount that you can borrow by way of a foreign mortgage.

If you consider raising equity on your current British property, you must accept that the additional sum that you add to your mortgage will incur interest, it will have to be repaid over the term or at the end of the term of your mortgage and that the whole loan is secured on your UK home.

Anyone considering their options for financing an overseas property should consult an independent advisor or broker so that they can take into account your individual circumstances, in terms of both the property you are purchasing and the financing options available to you.

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