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Industry in depth
All abroad
28 April 2007
Simon Conn looks at the options brokers have when it comes to entering the overseas property investment market
Broker involvement with overseas mortgages
The number of UK citizens seeking to buy property overseas continues to increase as a result of a variety of factors, including the expansion of globalisation, the growth of the EU, wider travel experiences, cheaper travel options, better investment opportunities than at home or the simple desire for a perceived better quality of life overseas.
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Not surprisingly, brokers based in the UK are increasingly looking at the possibilities of tapping into this escalating market, as such involvement outside of traditional home-based business activity is a potentially lucrative income stream.
However, this is not a decision to be taken lightly, as venturing into the overseas mortgage market can be fraught with difficulties if caution isn’t taken – each country presents a myriad of national and local laws, customs and language barriers that may put off all but the brave.
A different animal
The overseas mortgage market is completely different from the UK market and the differences need to be recognised and understood if a broker is to provide a good level of service for their client. Managing client expectations regarding the mortgage process is key. For example, when a client signs up for a mortgage on an overseas property, they may expect the process to be similar to that in the UK. Not so. While the front end administration may be similar, this is only the start of what can be a long and complicated process if it is not managed properly, and for that to happen it is vital brokers truly understand the lender administration requirements for each country.
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Clients will be looking to brokers for help and advice regarding all the paperwork and additional requirements when taking out an overseas mortgage, which is no surprise as this is completely alien to most. Therefore brokers need to be prepared to spend more time guiding their clients through the overseas mortgage process and this will involve being drawn into more areas such as whether a foreign currency mortgage is most suitable, which may depend on the intended use of the property.
Taking Spain as an example of how the mortgage process operates; on the plus side, the lender will not allow completion without having all the registration documents in place, which is ultimately good news for the client as this does provide a level of protection. However, this can be a lengthy process and client expectations must be managed to ensure this is understood.
In France, again on the plus side, contracts are normally signed usually straight after agreeing on a price, committing both the purchaser and the vendor to the sale, which means gazumping is much more of a rarity than in the UK.
However, timescales towards completion can be a problem – various cooling off periods apply in France at different stages of the purchase and can be quite lengthy. Ultimately though these are in place to help protect buyers.
Options
There are various options as to the level of activity in the overseas market that brokers may wish to undertake. The conclusion reached may be not to engage at any level due to the inherent complexities involved. In such cases it may be more prudent to simply direct the client towards a third party specialising in this market.
However, it may be possible to segment the market and cherry pick, offering loan arrangements in selected countries, such as those with more mature markets and established track records in providing loans for UK nationals, for example, France, Spain and Italy. For those clients with more adventurous tastes, with destinations in mind outside of the norm, the expertise and experience of a third party broker specialising may be the best option, as the mortgage process in ‘emerging market’ areas may be unproven, and a minefield for brokers not conversant in dealing with overseas lenders on a regular basis.
Brokers will need to be fully aware of the various offerings available across a wide range of countries, along with the specific legal and tax requirements for each country. This would involve establishing and maintaining an up-to-date and comprehensive knowledge of mortgage products and be able to offer the best loans available to their clients.
Looking at the mortgages available purely from a selection of European countries, for example, the most commonly available mortgages are repayment and interest only, the latter being a relatively new offering, and not yet generally in use in countries such as Greece, Malta, the Czech Republic and Bulgaria. The currency in which loans are offered also varies from country to country. Although the majority are available in most currencies, loans are only offered in euros in Italy, France and Bulgaria.
Standard variable rate loans are usually available, with an initial discount set rate for up to the first year, reverting to an additional percentage rate above the euribor, varying from country to country. Other variations the broker would need to be aware of are, for example, that loan-to-values are typically around 80 per cent, but can range anywhere between 70 per cent to 90 per cent. The maximum term of the loan can be as low as 15-20 years, but are offered for up to 40 years in Southern Cyprus.
Potential pitfalls
Clients also need to be made fully aware of the potential pitfalls when buying mortgages overseas, especially as with overseas purchases, the heart may rule the head when obtaining a dream property. Brokers should always be in a position to offer the best advice to their clients including:
- Always ensure independent advice is sought from solicitors, architects and surveyors, who are conversant in the relevant country’s laws and processes, and know the specifics involved in buying a property there.
- A valuation needs to be undertaken by the overseas lender, to highlight any possible problem with the property and any boundary disputes.
- Clients should never sign anything they do not fully understand.
- Mortgage finance should be arranged ‘in principle’ wherever possible, before there is an agreement to purchase the property, or before contracts are signed and deposits paid.
- Clients should be aware of the costs charged by the authorities.
- Foreign bank accounts will be required and a Certificate of Importation for any money brought in from the UK.
- Standing orders from the local bank account need to be set up to meet bills and taxes. Failure to pay taxes in countries such as France, Portugal and Spain could lead to court action and possible seizure of the property.
- Bills do not end at the asking price. Fees, taxes, and insurance must all be met in the host country.
Apart from financial considerations, there are legal and tax requirements which vary. Brokers should be prepared to refer clients to tax specialists for specific advice.
Therefore, brokers wishing to supply their clients with the best possible advice on overseas property have various options as to their level of involvement. As the UK has a long-established, competitive secured loan market, brokers may decide that the overseas market will present a lucrative and interesting challenge. Others may be of the opinion that creating mutually beneficial partnerships with a third party, specialising in overseas mortgages is the best option.
Ultimately, the key is to provide buyers with sound advice and guidance throughout the process. Whether people are buying purely for investment or are ploughing their hard-earned life savings into owning a place in the sun, they deserve the best possible advice and protection from the intricacies of each country’s individual laws and requirements. After all, in many cases, people only get one chance of buying their dream overseas home.
Adrian Mediratta, Managing Director, Urban Exposure
Figures from the Office for National Statistics (ONS) show the value of foreign property ownership standing at just over £23 billion. This number has doubled since 1999/2000. The number of Britons owning second homes abroad now stands at 257,000.
There continues to be a great deal of interest in the overseas market and it offers significant potential for brokers but, at the moment it tends to be the domain of fairly specialist organisations.
As an international residential property agent operating in many countries we have to organise mortgages locally and understand that it can seem complex and intimidating, with mortgages varying greatly from country to country.
2004 %
Spain 62,000 27
France 47,000 20
Portugal 4,000 2
Italy 3,000 1
Other Europe 35,000 15
USA 14,000 6
Other Worldwide 66,000 29
Sterling or foreign currency mortgage
The UK’s base rate is 5.25%, the EU’s 3.75% so, one would think that a foreign mortgage would be the most appropriate answer.
One advantage of sourcing a local mortgage is that mortgage interest can sometimes be deducted from any local income tax and capital gains tax liability if the property is making rental income or increases in value.
However, sourcing a local mortgage can be daunting for the broker and their client. Not only can language cause a barrier with legal and application processes varying from country to country, but foreign exchange fluctuations can have a greater impact than a marginal difference on interest rates, especially if the transfer of funds is not properly organised.
But perhaps the biggest issue is that, in contrast to its European counterparts, the UK has one of the most sophisticated mortgage markets in the world with widespread access to information and superior technology, such as systems like Trigold.
Within the EU, however, clients should be able to request a European Standardisation Information Sheet (ESIS), which aims to provide the consumer with a personalised illustration of a mortgage’s costs and features in order to help them compare mortgages and shop around.
A final point comparing the UK and European mortgage markets is that it also depends what kind of mortgage you are after. Overseas it’s difficult to get mortgages for buy-to-let property for example, and most mortgages are only available as capital repayment and not interest only.
“We have set up a referral scheme with overseas mortgage brokers, but the volume of overseas brokerages is very small in comparison to the volume of overseas property the British public buy. There are only a handful of professional brokerages that have an understanding of, and can work with foreign banks”, said Mediratta. “There is a real opportunity for brokers to specialise in a particular country, get to grips with the banks and products on offer, and to tie in with agents such as ourselves where there is a steady flow of clients and property sales to offer clients a professional mortgage broking service”.
Nia Jones, International Services Manager, Goldsmith Williams Overseas Ltd.
Many brokers already have a large database of clients who would be eligible to own their own property abroad. Exploiting the opportunities that this potentially lucrative market offers may seem a daunting prospect, particularly given the ever-expanding list of countries attracting UK investors. However, help is at hand in the form of specialist companies who provide a one stop shop for conveyancing, finance, currency exchange, tax advice and property sourcing solutions.
By establishing partnerships with these companies, brokers can earn additional income and, at the same time, ensure that clients have access to the necessary knowledge, expertise and quality service when considering such a major transaction.
Clients must first and foremost realise that the property system in the UK, although not perfect, is extremely advanced. Similarly, just as the UK’s property market is constantly evolving, so too are the overseas markets. From visa requirements to inheritance tax, property related legal requirements can be vastly different, even in neighbouring countries, and it would be nigh on impossible for brokers to keep up to speed with all of the intricacies of the property markets in every country.
A good example of this is Spain, where an estimated 70,000 UK investors are predicted to invest this year. A range of changes to tax levels came into force in Spain on 1st January 2007. Capital gains tax was reduced from 35% to 18% for non-residents, placing it in line with the tax rates for residents. The 5% withholding tax levied against non-residents selling in Spain was reduced to 3%. The tax on income including rental income received in Spain by non-residents was reduced from 25% to 24%.
For those planning to make Spain their permanent residence, capital gains tax has increased from 15% to 18%, the maximum rate of income tax for individuals has been reduced from 45% to 43% and corporation tax has been reduced from 35% to 32.5% (a further reduction to 30% is scheduled for 2008). For SMEs the rate will be 25%.
As well as doing research to identify overseas specialist companies to work with, there are some simple tips that brokers can offer clients when they first consider investing in overseas property. Goldsmith Williams Overseas Ltd (GWOL) recommends brokers use this five point checklist as a basis for ensuring that their clients are taking the right steps to a trouble-free overseas property purchase:
1. Seek advice from reputable independent solicitors, architects and surveyors with a good knowledge of the property market in the country in question.
2. Instruct a lawyer who will confirm that the property has title, planning, legal registration, etc.
3. Check costs carefully and never sign anything that you don’t understand. In particular avoid anything that is not a true English translation of legal documents. Speak to a tax/legal specialist before paying any reservation fees or deposits
4. Consider setting up standing orders in a local bank account to meet bills and taxes as failure to pay taxes in some countries, such as France, Portugal and Spain, could lead to court action and possible seizure of property.
5. Talk to your broker, who will help you identify the best finance solution – don’t simply use the developer’s or estate agent’s recommended lender.