Financing your Investment
Before you can identify a suitable property you need to be clear on your budget. You need to know what funds you have available, what you can raise by sale and through a mortgage as well as all of the costs involved in buying a property (allow at least 10% of the purchase price). Only then can you be sure what you can spend on the purchase together with any improvements required or planned and furnishing and equipping your new home.
If you are a cash buyer it may help you to secure an overseas property quickly, but it is not without risk. If you have sufficient equity in your existing property you may be able to raise the funds through a second mortgage. This is a familiar source of finance but opens exchange rate and other potential risks.
It is still essential in either case to take professional advice to ensure that an independent valuation of the property is carried out and that legal advice from a reputable lawyer ensures that you are buying correct title to a property and that you are being registered as the owner.
If you need to raise finance to fund the investment, you should seek finance arrangements early in the process so that you can identify the best prices and by identifying your source of finance you can establish yourself as a serious buyer by obtaining ‘Approval in Principle’. This can strengthen your negotiating position and ease the overall process.
Taking out an overseas mortgage is an increasingly popular option with increasing availability of providers and an increasingly competitive market.
You should use a specialist broker to identify suitable lenders as they will know who is offering the best rates and terms and will be aware of local customs and practices that you might not be aware of.
This can save you time, cost and effort, and there may also be tax advantages: for example in countries such as in France and Spain, taking out a mortgage may reduce inheritance tax by having a debt raised against the property.
- The lender will have to do its own checks on the property, carrying out a valuation of the property, verifying that a proper legal title exists and that the property is properly registered in your name. This can be a real advantage of this approach.
- There are advantages in having your asset and finance in the same currency, but this may be offset if the income that will fund repayments is in your home currency. Overall you will need to identify and manage any currency exposure.
- Each country will have its own customs and practices, national and local laws and foreign exchange requirements. It can be a long and complicated process if it’s not managed properly. Many providers today will not use set criteria as a base for their decision, but will look at each individual case, including the type and location of the property you plan to buy.
- Details about your income and outgoings will be required and so it will be important to have your details of your accounts easily available to demonstrate a satisfactory debt-to-income ratio or that you satisfy their affordability expectations.
If you are self-employed, you can still apply for an overseas mortgage to but you will need to have at least two or three years’ audited accounts and tax returns, and your last three to six months’ personal bank statements. Sometimes an Accountant’s reference will be required.
If you have retired and are on a pension it will be necessary to check any upper age limits. Advice from a specialist broker will help to source a mortgage to suit your individual profile.
Any past credit issues may make it more difficult to obtain an overseas mortgage as lenders like to see proof of a sound financial history. Offers will be dependent on your individual situation so you should seek advice.
Foreign Exchange Risks
Even small changes in exchange rates can make a big difference to the purchase price of your overseas property, your monthly mortgage payments or future rental income. Generally speaking, it makes sense that an overseas mortgage and the income used to service the mortgage repayments are in the same currency, thus avoiding exchange rate issues.
Taxation regimes vary from country to country. In Europe you may have to pay Value Added Tax (VAT) on new properties, Stamp Duty on resale of a property or other forms of sales tax elsewhere. There may also be local, regional or State taxes to consider.
If you rent out your property you may have to pay income tax in that country. You may also be subject to income tax in your home country (eg. The UK and USA) where you are taxed on your worldwide income. You may be able to offset the tax paid against your liability to tax in your home jurisdiction if there is a double-tax treaty in place.
Capital Gains Tax (CGT) is levied in many jurisdictions on the sale of the property depending on whether the property is your only or main residence. In some cases there is no CGT charged (eg., in Egypt or in Morocco after 10 years), but you may still be liable to CGT in your home country.
Inheritance taxes vary from country to country and should be understood, especially if you retiring to the new country. Tax planning may be possible.
You will need to take advice to ensure you avoid paying more tax than necessary. Advisors will need to understand the taxation rules and laws of multiple jurisdictions and so it is important to take advice from appropriate advisors and not assume your home financial advisor is qualified to advise on the implications in other jurisdictions.