Thousands of holidaymakers will be returning to the UK with dreams of owning a second home abroad. Whether it is as a buy-to-let, second home or even pension investment the reality of foreign home ownership is not all sunshine, sand and good wine. Who hasn’t read about the couple who bought a place in Spain only to find out it was on the route of a planned motorway? Or the retired gentleman who spent £3,000 to reserve a flat in Turkey that never got built?
The importance of advisers
Lino Brydges, head of Spanish mortgages at NatWest International, says that these scare stories are, thankfully, in the minority and that over 250,000 Brits have successfully bought a second property abroad.
He says: “While it’s true that buying abroad can be paved with pitfalls, the right advice at the beginning can help people make a rational, informed choice. Mortgage advisers can play a huge role in helping to manage the expectations of someone who wants to make their dream a reality.” He says many advisers are already successfully helping clients with dreams of a permanent plot in the sun. “A lot of our sales are via intermediaries and we expect that to grow. Increasingly people are seeing a second property as part of their pension portfolio so it’s natural their first port of call is their adviser.”
NatWest International estimates that last year UK residents bought over £1.5bn worth of property abroad and that at least a third of those buying used a mortgage adviser.
Brydges says: “Most people buy as a second home but we are seeing a rise in people buying to let as well. In fact there are more and more older people choosing to buy abroad as a buy-to-let investment.”
He says there is also anecdotal evidence to suggest that some frustrated first-time buyers, priced out of the UK, are buying abroad instead.
“Prices in the UK are pretty stable at the moment,” explains Melanie Bien, associate director at Savills Private Finance. “But in Europe, especially Eastern Europe, prices are still rising.”
According to the Office of National Statistics (ONS), 11 million Brits could own abroad within five years, with a further 18 million Brits expected to join them by 2016.
Mark Bodega, marketing director of currency firm HIFX, says: “In 1995, the average price paid for a second property overseas was 65 per cent of the average UK property price. By 2005 it had fallen to 37 per cent. This does reflect higher house price inflation in the UK market, but also the fact that buying a second home is now a mass market aspiration.”
Where to buy?
This is where an adviser can play a key part in helping their client beyond their mortgage application, says Bien. “It’s easier than it used to be to get a mortgage for a foreign purchase. Not only have rising property prices given people extra equity, the ever enlarging European Union has meant lenders are prepared to take the risk.”
Spain remains the top destination, with 46 per cent of buyers aiming to own there. “Spain is a tried and tested market,” explains Bien. “But increasingly people are wanting to buy in locations like Australia, Canada and New Zealand.
More and more holidaymakers are also attempting to buy in less spoilt places, like Eastern Europe.
Turkey is also becoming one of the property hotspots, with prices in some parts matching those in Spain.
Simon Conn, managing director of Conti Financial Services says: “Turkey is a three-hour flight away from the UK and accessible with plenty of cheap flights. But its selling point is the fact it has a more exotic culture than that of European countries.”
It’s tempting to look at unspoiled and cheaper places but clients have to be prepared to spend a lot of money, a lot of time and also ready for some serious hand-wringing during the buying process.
Bien says: “Turkey and Croatia are becoming very popular so are places like Poland and Lithuania. But these places have very different legal systems and things can be extremely bureaucratic. Buying in Spain and France is easier, which is why we advise a lot of our clients to look there first.”
Bien says advisers should encourage their clients to do some homework and should not be adverse to doing some themselves. “Even if they come to you desperate to buy a villa in somewhere well-known like Malaga, you still need to do your homework. Visit property fairs, look at websites, read magazines and ask around.”
Bien says: “If clients are serious, they should be visiting the area at a different time of the year. If you go out to a Greek island in July, the wine’s flowing and it’s all lovely. It might not be quite so beautiful in December. And at different times of the day. That’s when you find out just how how busy that cafe underneath your dream apartment is at 4am in the morning.”
Helping bring clients back down to earth is one thing, but advisers should also be encouraging them to think about their second home’s potential in terms of a long-term investment.
An area like Dubrovnik is up-and-coming and has access to three nearby airports, points out Bien.
“Having access to cheap flights also means you can use it as a weekend hideaway and it’s not too far away if you need to visit it in a emergency.”
But she warns clients must make sure there are alternative ways of getting there, as cheap flights are not always guaranteed.
Many local estate agents have set up foreign divisions. They may charge a bit more than local agencies, but they may help when you need to deal in English. “When you have a client who is thinking of buying abroad it may be a good call to create builder and surveyor contacts. If you have some of these to hand you can get a second opinion from them. I’d always advise talking to a builder if you know one,” says Bien.
Getting a survey may not be compulsory in the EU, but a client should be advised to pay out for one, she adds.
“It’s only in the UK that surveys are considered important. Flying out a surveyor may seem extravagant, but it can save your client a lot in the long run.” She adds: “Always find yourself a good solicitor, never let your client rely on one the estate agent has recommended.”
The mortgage
If finding the right location seems hard enough, getting the mortgage can be even tougher.
Conn says: “Even an experienced mortgage adviser will be surprised at how bureaucratic the process is.”
He explains this is because underwriting is more intense. Most UK banks will lend on property abroad but they will require a larger deposit.
Banks will alter their lending criteria depending on which country the property is in. Countries have variations in lending criteria, for example, loan-to-value (LTV) amount, currency availability and differing mortgage rates.
Conn says: “In Europe, there are certain countries where either a sterling or euro mortgage can be secured on the property. For example, in Spain, property buyers can arrange a mortgage in euros, sterling and all major currencies, but in Italy and France, only euro mortgages are available.”
The majority of buyers in Spain tend to take out euro mortgages, simply because European interest rates are lower.
“In Spain, mortgages rates are currently from 3.70 per cent and maximum LTV is 80 per cent, with the minimum loan being £30,000,” Conn explains.
But if a client is buying in France, they may be able to borrower more, often up to 90 per cent. “This is on a case-by-case basis, available on an interest only or repayment loan basis and rates are usually available from as low as around 3.10 per cent.”
The newest trend, particularly in France, is to buy a leaseback property. These have been around for some time, but have been proving more popular, with a steady increase in demand over the last two years.
The leaseback scheme allows investors to claim a TVA (France’s equivalent of VAT) rebate providing the property is leased back to the developer, which is normally for a period of nine or more years.
“It’s ideal for someone that only intends to spend a couple of weeks a year in their chosen property as there would be a guaranteed rental return for the remainder of the year,” explains Conn.
In Eastern Europe, Bulgaria has become the latest hotspot for overseas investment. “Banks have slightly stricter criteria because it is a less tested market,” says Conn. The maximum borrowing currently allowed is 75 per cent LTV, with rates from 6.45 per cent on euro mortgages only.
There are also stricter checks on a client’s existing financial commitments. As with any mortgage loan, current mortgage or rental payments in the UK or elsewhere are taken into account, plus any other existing liabilities, such as personal and bank loans.
Outside of Europe, Florida is the most popular long-haul destination. Here, you may be best opting for a local lender as US lenders may take up to 50 per cent of proposed rental income into consideration for mortgage purposes, while maximum borrowing is 80 per cent LTV in either a euro, pound or US dollar mortgage.
Taxes
But, like UK property, the mortgage may be the biggest expense, but it’s not the only one. Like a UK property purchase, the cost of legal fees and government taxes can often push the cost up. Brydges warns that in Spain local taxes can top the cost by over 12 per cent of the property’s value.
“To start with, a tax worth 7 per cent of the value will go in land transfer fees – that’s the extra paid to the Spanish authorities when the property changes hands. That’s very similar to the Stamp Duty you pay in the UK.”
Next comes legal expenses which will eat up another 5 per cent. “In Spain you have to pay two sets of fees. That’s the system,” says Brydges
Each country will have different fees and ways of charging them. In Turkey, lawyers command fees of between 4 to 5 per cent, although tax is relatively minimal. But all sales of property attract a capital gains tax of 25 per cent.
People trying to buy in non-EU countries face local anomalies. In Romania, which expects to join the EU next year, foreign buyers have to form a company. This is a straightforward process, but like Turkey it’s when the property is sold that tax is levied – 19 per cent VAT and 16 per cent capital gains tax.
In Australia, buying can vary from state to state. The only choice is to get independent legal advice from a solicitor or licensed conveyancer in the area where the client is planning to live.
Currency
The large amounts of cash being transferred have also inspired a whole new market in currency protection risk. Companies such as HIFX and Foreign Currency Direct claim British investors can save an average of £6,000 by being able to fix a currency rate for up to two years.
HIFX advises British consumers to fix currency exchange rates as soon as they agree to buy a property abroad.
Bogeda says: “Over just one month currency rates can change dramatically and have a real impact on the cost of a property abroad. For example, between June 2005 and July 2005, the euro rose by 4.70 per cent against the pound. This would equate to an additional cost of £6,500 on a property worth 200,000 euros.”
“It usually takes between six and eight weeks to complete a property purchase abroad and up to 24 months to complete an off plan property purchase, so it’s easy to see how currency fluctuations can have a massive hidden impact on the property buyer’s costs.”
Bodega says the extra money could be used to furnish a new holiday home or even pay for a swimming pool or a small boat. “Take the Hungarian Florint, which has been known to fluctuate by 4 per cent. If the value slides that month, it could see the value of £250,000 depreciate by over £10,000.”
Foreign Currency Direct says advisers should look for a company that specialises in foreign exchange only. Peter Ellis, chief executive of the firm, advises intermediaries to help their clients shop around. He says: “Advisers can help by getting comparative and independent quotes from other sources before they let a client commit to one particular company or organisation, especially if a company has been recommended by a third party, such as a property developer, who may have a vested interest in your transaction.”
Clients buying in Spain need to be aware that Spanish banks will make charges for receiving payments.
Ellis says most Spanish banks charge an administration or handling fee of up to 500 euros per 100,000.
“It does depend what country your client is buying in, but you need to check with your currency provider, any reputable company will help you avoid this charge.”
Ellis says currency speculation should be avoided. “Naturally you want your currency at the best price, but don’t play the money markets – it’s not worth it. In a volatile market you could end up paying a lot more for exactly the same amount of currency as a result of adverse price movement.
“Buying a property abroad is a dream that is increasingly becoming a reality for many Britons. By doing their research, ensuring brokers are trained and choosing a specialist currency provider buyers can save money by avoiding uncompetitive exchange rates offered by most high-street banks. Always consider obtaining a comparative quote, otherwise you could only be further inflating the enormous profits already being made by the banking sector, to your detriment.”
