So your client has been watching A New Cheap Sunny Place Abroad or something similar on TV and wants a piece of the overseas action. Luckily they have come to the right place because you want a piece of the action too.
But they don’t know what they are doing apart from having a pretty good idea that it’s sunnier over there. And you’re not authorised to give mortgage advice in a foreign country. But with the dream team in place let’s try to sort this deal. There are a number of important points to consider when advising on overseas deals.
Brokers should begin by being wary of clients with a ‘me too’ attitude who only want an overseas property because it is fashionable to have one. The British love affair with buying property overseas shows no sign of abating, potentially drawing in more and more vulnerable buyers.
Barclays reckons the number of Brits who own property abroad is set to double to 4.4 million. And 5% of those surveyed by the bank already own a home abroad, which is the equivalent of 2.2 million people in the UK. A further 5% say they are definitely going to buy in the future. Those considering buying abroad amount to 37%.
Barclays’ research reveals that the main concerns of people considering a foreign property purchase are getting caught out by local legal or tax issues, keeping the property secure while it is empty and not being able to understand the local language.
Being taken for a ride and paying too much for a property are also highlighted as worries. These problems are compounded when buyers start to look further afield in search of a bargain.
Matt Havercroft, editor of A Place in the Sun magazine, has seen the phenomenon at first hand.
“While many are buying in Europe in both the popular and emerging markets there is an increasing interest in long-haul destinations such as Egypt and Morocco,” he says.
“With prices starting from as little as 20,000 the possibility of owning an overseas property has never been more real for people.”
Does your client have a large enough deposit to do the deal? With many people struggling to get onto the property ladder in this country, it is becoming more common for them to look to less expensive markets in overseas locations.
But in many countries buyers need to put down a much larger deposit than would normally be the case in this country.
Overseas lenders often require a deposit of 20% or 30%, according to VEF French Property.
Brokers should also be aware of their client putting down a deposit on a property assuming that it is returnable if the deal does not go through. In most countries paying a deposit on a home commits the buyer to the purchase – even if it is termed a ‘reservation deposit’. And foreign estate agents may not be bonded to hold money on a client’s behalf.
Rob Griffiths, associate director of the Association of Mortgage Intermediaries, says the most important point to bear in mind is that buying a house abroad is different from buying in the UK.
“Each country has its own laws regarding property and mortgages, and there will be differences in practices, customs and regulations too,” he says.
AMI suggests there are some questions that should be asked before your client signs up to buy a property abroad. This is particularly important as these questions may never arise when buying in Britain.
For example, is there any debt on the property that would be taken on by the buyer? In some cases, property developers may borrow money on the security of individual plots in overseas developments.
If your client is buying a plot in a development, what happens if the developer ceases trading? What happens if not all plots are sold? Did the developer have planning permission? And will all utilities – electricity, water, drains – be connected without cost to the client?
These are pretty standard questions to ask but some legal problems come out of left field. For example, in Poland if you are married you are not allowed to raise a mortgage as an individual – both partners in the marriage have to be partners in the mortgage.
Simon Conn, managing director of Conti Financial Services, suggests clients should always check with the estate agent or seller that they have been fully informed of the costs charged by the legal and government authorities for buy- ing a property in their chosen country. These costs vary enormously from place to place.
They should also open a bank account in their chosen country and make sure they get a certificate of importation for the money they bring in. They should set up standing orders in a local bank account to meet bills and taxes. Failure to pay taxes in countries such as France, Portugal and Spain, can lead to court action and seizure of property.
Conn also points out that bills do not end at the asking price. Lawyers’ fees, taxes and insurance must all be met in the host country, and can add substantially to outgoings.
And clients will have to get English translations of contracts and other details if these have been drawn up in the local language.
A recent survey by the Post Office revealed that more than half of British travellers failed to recognise a euro note when shown one, so you may find yourself having to explain the concept of currency risk to your clients in the most basic terms.
If your client is taking out a sterling loan to buy an overseas property and also earns in sterling, there is no currency risk attached to the purchase. But if they earn in sterling and take out a foreign currency mortgage, they are exposed to significant risk from foreign exchange fluctuations.
AMI quotes the example of a mortgage denominated in dollars where the interest – at a constant 6% – is paid in sterling. Assuming that the mortgage is $200,000 and the dollar is worth 50p it is possible to see how the amount of monthly interest payable changes if the /$ exchange rate moves.
If sterling rises by 50%, monthly payments fall from 500 to 250. On the other hand if sterling falls by 50%, monthly payments increase from 500 to 750. Can your client afford that?
Similar problems ensue if the client takes out a sterling mortgage but earns in another currency.
For more savvy investors, creating a mortgage in the currency of a country that tends to keep interest rates low may be appealing. Last year, John Charcol launched the Swiss Mortgage – the first sterling mortgage based on Swiss franc interest rates.
It is based on three-month Swiss franc interest rates but is a sterling mortgage so it has no currency risk to borrowers. The pay rate at launch was 3.99%, well below equivalent trackers based on UK rates.
Ray Boulger, senior technical manager at John Charcol, explains the mortgage is based on the same concept as John Charcol’s Federal Reserve mortgage, which tracks the US inter-bank interest rate.
“Swiss short-term interest rates have always been much lower than UK rates,” he says. “Indeed, the Swiss franc three-month rate has been under 1% for the past four years and the highest it has been in the past 10 years is 3.59%. In comparison, the UK three-month rate has been between 3.39% and 5.01% in the past four years. The highest it has been in the past 10 years is 7.87%.
“It is important to understand the difference in risk and reward with a sterling mortgage linked to a non-sterling tracker rate, compared with an ordinary tracker mortgage linked to UK interest rates. Obviously, as with any variable rate mortgage, there is interest rate risk but the main attraction of this mortgage is the lower interest rate compared with an ordinary tracker mortgage.”
In this country and in most of the developed world we have grown used to being able to freely transfer money across borders whenever we want. But as recently as 1979 the UK government still had powers to restrict the amount of sterling taken out of the country.
Clients should check that they can freely transfer money to their chosen country to buy property. And if they are able to do it today, will that country retain free exchange if its government changes? And what if they can’t get their money out when they sell the property? For example, in the unlikely event of your client buying in Brazil this could be a problem as exchange is strictly controlled there.
British buyers abroad can find themselves in the nightmare of being chased for tax by the revenue authorities of two countries.
If a client remains a UK resident any gains they make on property – even overseas – are potentially assessed for tax in the UK. They must declare in a self-assessment tax form any income from letting out the property or gains from selling it. And the income may also be taxable in the country of the overseas property.
Britain has agreed with most other countries that tax is not automatically levied twice on the same income or gains. But it may take your client a while to unravel this double tax whammy and they may need to employ a tax specialist.
Get specialist legal back-up when advising on buying in Eastern Europe
Nia Jones is international services manager at Goldsmith Williams Overseas
Eastern Europe looks set to be one of the big growth areas for overseas property investment in the next few years.
Although house buying processes and legal systems vary from country to country there are some general guidelines that should help brokers when they are asked for advice on the ins and outs of buying property in Eastern Europe.
Many buyers looking to buy property in the region will be buying new-build properties off-plan. Buying off-plan differs substantially from buying an existing property so there are a number of factors that buyers should take into consideration.
When buying off-plan, buyers will have to negotiate the terms and conditions of the property purchase prior to its construction or when it is only part finished. In some countries such as Bulgaria a preliminary contract will be signed and the buyer will then pay part of the agreed sale price to finance the property’s construction.
The preliminary contract provides both seller and buyer with the terms and conditions of the final purchase contract. It includes the sale price and method of payment, deadline for the construction of the building and requirements concerning its maintenance.
The buyer will only own an off-plan property when construction is complete. At this stage and when the construction permit has been granted – meaning the municipal authorities have sanctioned the construction – the final contract will be signed and the transfer of ownership will take place.
There are a number of potential risks that should be taken into consideration when buying homes off-plan in Eastern Europe.
As part of the sale price is paid prior to the completion of the building it is vital that the developer is reputable and experienced. Problems can be avoided by undertaking research into the developer. Has it successfully completed similar projects and have there been any complaints made against it? The developer should be able to provide information on the planned stages of the construction process, design documentation and anticipated date of completion.
If the existing land mortgage is not cancelled prior to the transfer of ownership the buyer risks losing ownership of the property if the creditor is required to go to public sale. Again, this can be avoided by requesting information on any existing land mortgage and its value.
Buyers should use an independent company other than the developer to look into compliance with the legal requirements of the country in which the house is being bought.
The content of the preliminary contract is normally suggested by the developer and therefore tends to favour the developer’s interests. It is important to read the contract in detail and seek expert legal advice to ensure it meets the buyer’s interests.
As all or part of the sale price is paid prior to the transfer of ownership the buyer should declare the preliminary contract final and binding. But it may be advisable to include protective clauses in the preliminary contract to avoid risks.
Buying a property overseas off-plan can be a complicated process but fortunately, specialist legal firms can do a lot of the work on your client’s behalf.
Tax implications of becoming non-resident
If your client spends most of their time abroad or is planning to do so they may become a UK non-resident in the process.
According to the taxman, if your client’s absence from the UK covers at least three years or if evidence becomes available to show that they have left the UK permanently they are a non-resident.
Potentially they may have to wait three years before the taxman treats them as non-resident. This often happens when people who move abroad also retain a home in Britain.
But if they are truly resettling to a place in the sun and have given up their property in this country, the taxman is likely to regard them as provisionally non-resident from the date of their departure. Then, if they are careful about not visiting the old country too often, they can wave goodbye to British Income Tax and Capital Gains Tax forever.
When this happens, ex-pats often start to use offshore baking facilities in the Isle of Man, Jersey or Guernsey. This is because banks there – unlike in the UK – do not automatically deduct Income Tax from interest paid. And UK non-residents need not pay British Income Tax.
In this situation clients may be more comfortable borrowing offshore as well as saving there. Many of the big British lending institutions have offshore mortgage operations.
Among these is Lloyds TSB International, whose International Mortgage Service offers British ex-pats funds to buy holiday homes, buy-to-lets or investment properties. The lender already has 20 years’ experience of overseas property finance in countries such as Australia, New Zealand, Spain, Canada and the United States.
The latest country to be added to the list is France, with Dubai, Portugal and Cyprus due to join this year.
Multi-currency loan facilities are available in nine currencies, allowing borrowing in the currency of income or of assets and free currency switching options are available.
Clients’ finances must be sorted out early
Chris Tanner is managing director of Blevins Frank
The number of British people moving overseas to start new lives in the sun is on the rise. Plenty have already made the move successfully but for many others things don’t work out as planned. This is often because their moves were poorly researched – possibly because they believed all the good things they heard and did not appreciate that the reality can be different.
Many people do not have enough capital to back their move or do not set up their finances in the most beneficial manner. A lot of people moving overseas are retirees. Inflation is therefore a key issue for them but many do not consider it a risk they need to plan for. Statistically, people live an average of 20 years in retirement and during that time the buying power of their savings can fall significantly. It is essential that their capital is invested in such a way that it at least keeps pace with inflation. But many people, believing they are avoiding risk, leave their savings in a bank account where the earnings are eroded by inflation and tax.
Besides ensuring they have enough money to live comfortably for the rest of their life, retirees also need to have enough set aside to deal with unexpected capital expenses such as home improvements, medical expenses and health care. It is not uncommon for retirees to run out of money 15 or 20 years after moving abroad, and they may find they are not entitled to state welfare benefits or national health services in the country they have moved to.
And younger, working people often move abroad presuming that they will be able to get jobs there, but this is not as easy as many expect, especially if they do not speak the language of the country concerned. Often jobs are limited to those involving the ex-pat market and salaries are significantly lower than in this country.
Television programmes about living overseas encourage people to supplement their income by renting out part or all of their property for some of the year. In reality it can be hard to find occupants so it is important not to rely on rental income to survive.
If the person moving overseas sells their UK property to buy one abroad, this may tie them to the country they are moving to more than they imagine. The resale market may not be as buoyant as the UK, especially if the area they live in has many new-builds available. Even if the property has theoretically increased in value it may be difficult to find a buyer and if life abroad has not worked out as planned, a move back to Britain may not be possible until the house is sold.
Taxation is another element often given too little consideration. It is important to look into all taxes to be paid on income, property and assets, and to know these can be afforded each year. Setting up a client’s finances early, appropriately and legitimately could lower their tax bill. Inheritance taxes, not to mention inheritance law, are often different from the UK and can be a nasty surprise for beneficiaries.
A move overseas is a viable option but only if all the above points have been considered, all the necessary research done and the client’s finances can support the move even in the worst case scenario of not finding a job or securing rental income.
Clients should be aware of the pros and cons of raising finance abroad
Trisha Mason is founder and managing director of VEF French Property
As the overseas property market expands, more potential buyers are considering the pros and cons of raising finance abroad compared with in the UK. People who hold UK mortgages may find this approach to be more straightforward as it could save them costs initially. Interest rates may be lower abroad and this will match the currency of their assets and liabilities.
Each country has slightly different rules and regulations and buyers must be advised to do their research carefully before making an agreement to buy a property.
Your clients should know their budgets before searching for property and take into account expenses such as legal and agency fees, which may be higher overseas than in this country.
In contrast to UK financing, overseas lenders often require a deposit of 20% to 30% on a property abroad so buyers must budget for the extra initial outlay. They must ensure they have been pre-qualified for a loan and have secured their deposit.
Just as in the UK, good overseas properties sell well and buyers will need to act quickly to secure their chosen one.
In researching the lending options buyers should not assume that a developer’s mortgage arrangements are the best that they can get, or are the most suitable for their requirements. Instead they should be receptive to listening to the options. For example, a variable rate mortgage is unlikely to have early repayment charges and long-term fixed rates may be more appropriate if buyers intend to rent out their properties as they will not be exposed to interest rate fluctuations.
Self-cert mortgages are virtually impossible to find. Overseas mortgages are normally full status and buyers should be prepared to provide supporting documents to prove the income and outgoings they declare.
Another important point to consider is that buyers wanting to borrow for the costs of renovations should check carefully that their lender will accept this. They will have to supply estimates for the work to be done.
It pays to shop around for the best lending deals. Although overseas property is still a niche market, an increasing number of specialist brokers and new lenders now operate within it.
And now for the small print. Buyers should not sign any binding contract without doing their homework and should make sure that their lawyer is aware that they require a mortgage so this can be confirmed in the sales contract.
This should guarantee that if they are unable to obtain a mortgage their deposit will be returned.