Fuelled by aspirational TV programmes, cheap flights and low interest rates, the British are buying property abroad as they've never done before. Now, more than 800,000 of us now own an overseas home – up 45 per cent since June 2004.
Predictably enough, a phalanx of support services have spotted the potential demand from buyers in every area of the business of finding and managing a property in another country, and it's now possible to employ the expertise of specialist property finders, lawyers, tax accountants and mortgage brokers.
Specialists can undoubtedly help smooth the path when you're dealing long-distance with uncertain situations, unfamiliar systems and language barriers. But professional support doesn't reduce the need to take responsibility for your purchase – it is, after all, your money you're spending, not your advisers'. So what should you consider before you buy?
What to choose and how?
You don't need to know the country in depth, but you do need to decide on a manageable area within which to limit your property search. A decent agent with a broad portfolio of properties on the books should be able to help in this, and in identifying the kind of property most suitable for your needs.
"An awful lot of people have only a very vague idea of what they want, but it's important to narrow down your search as much as possible or you'll never be able to make your mind up," advises Mike Craissati of UK-based agent Tournesol Properties.
If you're looking for an investment property, you may well be able to get useful guidance from selling agents as to the relative merits, prices and rental returns of different countries. Larger international agents, such as Savills, and Knight Frank, may be useful for a broad overview.
One key issue is access. Low-cost airlines have opened up new areas, both within established destinations and in more exotic outposts – and the process continues. For example, forthcoming routes from easyJet include London to Krakow, London to Zurich, and London to La Rochelle in France. Other countries operate a growing number of low-cost competitors – look out, for example, for Berlin Air, Atlas-blue (to Marrakech), and Wizz Air (to east European destinations).
But while it's unlikely that the trend towards cheap flights will see a reverse in the foreseeable future, unprofitable routes won't last long. "I always advise people to make sure they're within two hours of a major hub or charter airport as a fallback, regardless of the local low-cost service," says Mr Craissati.
Finding the right place
These days there's a plethora of UK-based agents to approach. At the top end are the giant international consultants, such as Savills and Hamptons International, who deal mainly with developers and pricier resales in a range of 'international' destinations.
But there are also numerous small specialists with indepth knowledge of their patch, typically covering a single country or region. They generally act as the interface between you and a range of local agents and developers, and they make their money by splitting the commission with the selling agent so there's no cost to the buyer. Increasingly, they not only bring you together with a suitable property but also offer valuable advice on rental income, tax and legal matters.
If you're short on time and relatively long on money, you could consider using a local property search agent to do the legwork, find the right place, negotiate the deal and represent your interests through the purchase process. The Property Finders, for example, covers the Costa del Sol and Costa Brava, Mallorca, the Algarve, the south of France, and the Italian lakes. You'll pay 2.5 per cent of the sale price for a successful search, but could save yourself considerable hassle.
Legal issues
The basic aims of legal checks are the same as for a UK property – to make sure it has good title and full planning permission, no debts and no restrictions on use that could impede your plans for it. But should you employ a local lawyer or a specialist outsider?
A local lawyer may be cheaper, and could be fine if you're fluent in the local language. But there are advantages in using one of the handful of legal firms based in the UK, which specialise in overseas property conveyancing. The obvious one is that they can explain the system, choices and any problems in your language.
Additionally, UK-based lawyers will be insured against negligence so, if they make a mistake, you will get compensation. In many other countries there are no requirements for lawyers to carry insurance against this risk.
"Talk to your lawyer before you buy anything, and sort out key issues such as who should own the property, how to minimise your tax liabilities and what to do about mortgages," says John Howell of international law firm The International Law Partnership (formerly John Howell & Co). It may, for example, make tax sense to buy using a property holding company. Most importantly, adds Mr Howell, "Use an independent lawyer – not the estate agent or developer’s choice."
Should you get the property surveyed?
It's part of the buying process in the UK, but not in other countries. Even so, property purchase is a big decision and a big outlay. Mr Howell recommends using a surveyor for anything more than five years old, or for unusual properties.
The difficulty, says Mr Craissati, is that many European countries don't have an exact equivalent to a UK surveyor. "You could use an architect, or a land surveyor, or a builder to do the job, although in much of France, there are UK surveyors offering the service to UK buyers," he suggests. If you're buying new, make sure the builder has bank guarantees, so that your money is safe if his business goes under, and that the property has all the necessary guarantees.
Financial options
How are you going to pay for your overseas property?
The choice is basically between buying with cash, or taking out a mortgage, either in the UK (against your family home), or locally (against the property itself). There are pros and cons with each approach so, ultimately, it's a matter of personal preference and circumstances.
The big attraction of being a cash buyer is that it's all done and dusted – you don't have the worry of whether you'll be able to meet the mortgage payments, or make the place pay for itself. The flipside is that you're tying a lot of wealth up in a very illiquid asset, where it's difficult to access if you need it suddenly.
Mortgages involve much less financial commitment up front – typically a minimum 20 per cent deposit – and may also have advantages for buyers planning to rent their property on a commercial basis, as the mortgage interest payments can be set against rental income to reduce their UK income tax bill. Against that, over the lifetime of the mortgage, you could end up paying two or three times the property value once interest payments are added on.
If you're going to use a mortgage, you have two options. Either you can increase the mortgage on your UK home and use the equity released to pay for the property, or you can take out a local currency mortgage. Again, there are pros and cons. Overall, says James Cotton at London & Country Mortgages, it's sensible to have your mortgage in the same currency as the source from which you'll make interest payments, so that the payments are not vulnerable to foreign exchange fluctuations.
"If you are working for a UK employer and paid in sterling, then it's probably better to use a sterling mortgage," explains Mr Cotton. "Conversely, if you're renting your property out and rent is paid in, for example, euros [which is most likely if you're aiming for a more international clientele, as opposed to only British tenants] then a euro mortgage from a local lender will be more sensible."
Against that consideration, overseas mortgages are generally cheaper: rates are approximately 1.5 per cent lower than in the UK. "It depends where you buy," says Mr Craissati. Mortgages in Switzerland are approximately 3 per cent, while in France, Italy and Spain they're approximately 4 per cent. But as Mr Cotton adds, rates have been going up around the world and moving a lot generally in recent months.
If you are tempted to take the currency mortgage route, but don't have a local currency income stream (for example, if you're not renting your house out), it is quite feasible to do away with the problem of currency exchange uncertainty altogether, by fixing your exchange rate for a certain period through what's known as a 'forward contract' with a specialist currency broker.
Mark O'Sullivan, head of trading at broker Currencies Direct, says that customers usually put down a deposit of 10 to 15 per cent and that secures a guaranteed rate of exchange for a set period. "Whenever the currency markets move favourably, we get customers 'stocking up' in advance like this," he comments. This arrangement can be used to make regular mortgage payments in local currency from your sterling account.
If you want to investigate overseas mortgages, a good place to start is a specialist broker, such as Conti Financial Services, which offers a wide range of products across more than 30 countries.
Whatever financial route you take in paying for your property, from time to time you will probably have to make transfers from a sterling account to a local currency account – whether for a deposit or full-cash payment, regular mortgage payments, or to cover the cost of furnishings, repairs or local taxes. Again, a currency broker is your best bet. Unlike most banks, brokers do not impose handling charges at either end of the transaction – additionally, they offer markedly better exchange rates.
"For example," says Mr O’Sullivan, "the dollar rate is currently about two to the pound. The average high-street bank would offer approximately $1.93 or 1.94, while we're currently offering approximately $1.98 or 1.99." If you're changing £100,000 into dollars and the CD rate is 4¢ higher, you make a gain of $4,000 ($194,000 against $198,000).
What about taxes?
These will vary from country to country. Local property taxes are usually very cheap by English standards – maybe £20 a year for a rural property in Turkey – but they can be as much as 2 or 3 per cent of the property value in other countries.
"Income tax on rental income is payable first, and foremost, in the country where the property is located," explains Mr Howell. "You have to declare that income again in the UK; you then calculate the UK tax owed, but double tax treaties between the UK and many other countries mean you can generally deduct from that sum the amount you've already paid overseas." Similarly, if you sell, you can set off any capital gains tax paid against your UK tax liability.
Inheritance tax will also apply, and can be as high as 60 per cent of the asset value in some countries. Watch out for problematic inheritance tax laws in certain countries – notably France. Your lawyer should be able to tell you how best to own the property, so as to minimise the risk of being caught by them.
Finally, if a rental income is important to you, how best to go about finding tenants? Don't use a local agent, warns Mr Craissati. "French and Italian agents will take up to 40 or 50 per cent of the rent, and will only market to the local population, and for the high season."
Mr Craissati recommends advertising through one of the many internet portals, for which you'll be charged £60 to £100 a year, and taking bookings direct from tenants. You'll need to find a local letting agent to manage the changeover days.
Answer these questions before you buy
John Howells, an expert in international property law, explains why investors need to decide what category of buyer they fall in to.
Do you know what type of investor you are? Are you an investor at all, or are you only looking for a holiday home, or a place to retire?
Knowing the answer to this question is one of the most important pieces of information that you need when buying property abroad. If you don't know the answer then there's a real chance that you'll buy the wrong property in the wrong place. Then you will be disappointed, or not make any money, or (worst of all) both.
What are your choices?
Some of our clients are buying a holiday home. They may want to have their kids spend the summer there, and they may be quite happy to allow a few close friends and other members of their family to use it, and make a small contribution to the running costs. But they are not trying to make money. They are not trying to let the property to maximise income. If the property goes up in value, it's a great bonus, but this is not why they bought it.
These buyers need to buy a house in a place they like, that has the infrastructure that they require, and is easy to get to at the times they want to travel.
Other people want a holiday home, but they also want it to make money for them. They want to cover at least a large part of the annual running costs from rental income, and they want a house that is going to grow pretty quickly in value.
These type of buyers need to make two choices.
First, how much they are prepared to compromise on what they really want in a holiday home in order to have a property that will be more let-able and/or grow more in capital value? Some people are not prepared to make any compromises. Others will go quite a long way.
Second, are you are prepared to forego visiting the property at times of peak demand and, consequently, maximum rental income? If you have a beach property it will make a lot more money if you let it out in July and August. If you have a ski property do you need to visit in January or February? If you can make these sacrifices it will help a lot financially.
Others won't go that far. Many of our clients visit the property in June and change it into 'letting mode' (removing valuables, etc) and then let it for the whole of July and August. They then return in September and convert it back into 'family mode'. During the rest of the year only they, their friends and family use the property. Surprisingly, they can often make 75 per cent of the rental income that they would expect if they tried to rent it throughout the year.
Some clients, however, are pure investors. They don't care about using the property themselves. They just want to make money. But that is not the end of it. They, too, divide into various groups.
First, is the tiger. This is the person who will go to the ends of the earth to search for the freshest meat, with the greatest potential for growth and/or income. They understand about risk and reward, and they are prepared to take quite a lot of risk for the prospect of higher levels of reward. They will generally protect their position by having a portfolio of properties in various parts of the world.
Next, you have the lonely planet investor. The lonely planet investor wants to invest in hot new destinations – but only after somebody has been there to write the guidebook. He accepts less reward for quite a lot less risk.
Then there are Ferrari investors. They're people who want to do something a little different. They accept that they might break down more often than if they had bought a Mercedes, but they hope that what they have bought will turn into a classic and go up in value quite rapidly over the years.
But lonely planet investors might be better off being smart investors.
Smart investors are the types who recognise there are some great bargains – and absolute dogs – in every country and that if they buy the right property in the right place with the right finance structure they can often do just as well in a ‘safe’ destination such as Paris, or Spain, as they can in more exotic locations.
John Howell's top tips
Many keen investors think that buying an overseas property is an easy thing to do. I'm afraid this is not so. Finding the right market and property is a serious and difficult decision to make and can under certain circumstances be risky, if you haven't done the necessary due diligence.
We advise our clients to carry out a proper check on the property before signing any contract or making any down payment.
Independent advice from a local solicitor is highly recommended, too. His assistance and judgement on the development or property will be further support for making a decision. It is also worth checking the developer’s reputation and making sure that the company has planning and building permission for the development. A good developer will always assist you and have documents and licences ready for you to view.
Buyers who don't do the necessary research before buying a property in a foreign market are putting their investments at risk and should not be surprised if the investment turns out to be a trap.
If one of our clients intends to buy a property in a foreign market and is uncertain about specific regulations regarding the purchasing process, we can assist with first-hand knowledge. Visit: www.lawoverseas.com.
Contacts
Tournesol Properties - T: 0870 874 4001, www.tournesol-properties.com
John Howell & Co - T: 020 7061 6700, www.lawoverseas.com
Currencies Direct - T: 0845 389 3000, www.currenciesdirect.com
London & Country Mortgages - T: 01225 408000, www.lcplc.co.uk
Conti Financial Services - T: 01273 772811, www.mortgagesoverseas.com.
