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Mortgages

Posted on: 15th Jan 2015

Mortgages or home loans for those buying a home abroad may be available in your home country, the country where the property is situated, and possibly also from financial institutions in offshore banking centres. The amount that can be borrowed varies depending on the country where the property is situated, the country where the loan is to be raised, the lender, and, not least, your financial standing. In recent years (2008-09), lenders have tightened their lending criteria in most countries due to the repayment problems experienced by recession?hit borrowers, and some lenders apply strict rules regarding income, employment, the type of property on which they will lend and the amount (LTV) they will lend. Foreign lenders, such as banks in offshore financial centres, also have strict rules regarding the nationality and domicile of borrowers, and the percentage they will lend. In theory, lenders based in European Union (EU) countries are allowed to make loans anywhere within the EU, but in practice a single market doesn't exist.

            In some countries the law doesn't permit banks to offer mortgages or other loans where repayments are more a certain percentage of net income, e.g. one-third (which includes existing mortgage or rental payments). Joint incomes and liabilities are included when assessing a couple's borrowing limit (usually a bank will lend to up to three joint borrowers). Most banks require proof of your monthly income and all out-goings such as mortgage payments, rent and other loans and commitments. Proof of income usually includes three month's pay slips for employees, confirmation of income from your employer and tax returns.

            If you're self?employed, you usually require an audited copy of your balance sheets and trading accounts for the past three years, plus your last tax return. However, 'no-income qualifier' loans are available in many countries of up to 60 per cent of a property's value. If you want a mortgage to buy a property for commercial purposes, you must usually provide a detailed business plan. In most countries it's customary for a property to be held as security for a loan, i.e. the lender takes a first charge on the property which is recorded at the property registry.

            Mortgages are granted on a percentage of a property's valuation, which itself may be below the actual market value. The maximum mortgage granted in most countries is 70 to 80 per cent of the purchase price, although it can be as low as 50 to 60 per cent for non?residents and buyers of second homes. Loans may be repaid over 5 to 30 years, depending on the lender and country, although the usual term in most countries is 10 to 20 years for residents and possibly less for non?residents. Note that most mortgages terminate at the age of 65 or 70. Repayment mortgages are the most common type in most countries, although endowment and pension?linked mortgages may also be offered. Repayments are usually made monthly or quarterly, although bi?weekly payments (which reduce the interest considerably) are possible in some countries.

Note that you must add expenses and fees totalling from around 5 to over 20 per cent of the purchase price (depending on the country) to the cost of a property. There are various fees associated with mortgages, e.g. most lenders charge an 'arrangement' fee and although it's unusual to have a survey in most countries, lenders usually insist on a 'valuation survey' before they grant a loan.

            Always shop around for the best interest rate and ask the effective rate, including all commissions and fees.

Foreign Currency Loans

It's generally recognised that you should take out a mortgage in the currency in which your income is paid or in the currency of the country where a property is situated. However, it's possible to obtain a foreign currency mortgage in major currencies such as GB£, US$, Swiss francs or Euros. In the '80s and '90s, high interest rates in many countries meant that a foreign currency mortgage was a good deal for many people. However, most borrowers should be wary of taking out a foreign currency mortgage, as interest rate gains can be wiped out overnight by currency swings and devaluations.

            The advantage of having a mortgage in the currency in which your income is paid is that if the currency is devalued against the currency of the country where you own a property, you will have the consolation that the value of your home abroad will (theoretically) have increased by the same percentage when converted back into your 'income' currency. When choosing between various currencies, you should take into account the costs, fees, interest rates and possible currency fluctuations. Irrespective of how you finance the purchase of a home abroad, you should always obtain professional advice. Note that if you have a foreign currency mortgage, you must usually pay commission charges each time you transfer currency to pay your mortgage or remit money abroad. If you let a home abroad, you may be able to offset the interest on your mortgage against rental income, but pro rata only. If you raise a mortgage abroad or in a foreign currency, you should be aware of any impact this may have on your tax allowances or liabilities.

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