Owning a home abroad is the dream of a growing number of Britons. Aside from the pleasure that comes with personal use of a foreign retreat, the possible capital growth and rental income could contribute to a more comfortable retirement. However, it's important not to let dreams affect your judgement, especially when it comes to the serious matter of how to pay for your new investment.
As obvious as it may sound, it really is essential to do the sums properly before committing to a purchase, particularly if you're buying a property that is priced right at the top end of your budget. As with all property purchases, you will inevitably end up paying more than the agreed purchase price once all other costs are factored in.
Country-specific charges
Buying expenses vary significantly from country to country. For example, Gibraltar and the Channel Islands apply no stamp duty at all to home purchases, whereas Spain charges around 7 per cent of the purchase price in stamp duty. This makes a huge difference to your outlay, especially when you're purchasing an expensive property. To become the owner of a E1m villa on the Costa del Sol, you'd have to stump up an eye-watering E70,000 in stamp duty alone.
Where possible, understating the purchase price may reduce the amount of stamp duty payable. The vendor may well encourage you to do this, as he is likely to end up paying much less in capital gains tax (CGT) as a result. By declaring a low purchase price, however, you will only be storing up a future CGT nightmare for yourself. What’s more, if the authorities discover that the price has been understated, you as the new owner of the property, will be first in the firing line.
Even if you're lucky enough not to have to pay stamp duty, legal fees and notarial costs will almost certainly be required, whatever the market. In some situations, the vendor may tempt you to save money by suggesting that you use the same lawyer or cut other corners within the process. This is almost always a recipe for disaster – you could easily end up losing out, if only at a much later date.
Beware incentives
To persuade you to buy a new property, developers frequently offer attractive-sounding incentives. These typically include offers to pay your mortgage for the first few months or a guaranteed rental yield over a certain period. In many cases, however, the developer will simply overcharge you for the property in the first place, making the 'incentive' little more than a sham. The lesson: don't be swayed by special offers and make sure you drive a hard bargain on price, even when dealing with a big developer.
Charges
While becoming an overseas landlord involves many uncertainties, the one certainty for most people is having to meet a monthly mortgage payment. This will probably require you to make regular money transfers to your overseas mortgage lender. Even though we live in an age of multinational banks and instantaneous electronic communications, sending money abroad can still be an irritatingly costly business.
Many banks charge fat fees for sending money abroad, in addition to exchanging your pounds into the foreign currency at an unfavourable rate. Over time, these fees can really add up. According to critics, you can end up losing out more on transfer charges than you do on the exchange rate in the long run. Fortunately, there are a number of ways around this problem.
A growing number of firms now offer transfer services. Typically, they offer to wire money for you at no cost, in return for your agreeing to put a certain amount of business through them. For example, you might sign up to send a year's worth of monthly payments via one of these companies. As well as eliminating transfer charges, using a money broker can also help you manage your exchange-rate risk.
Currency headaches
Fluctuations in the pound against other currencies can cause a big headache for the UK-based owners of overseas property. If sterling drops heavily against the currency of your mortgage, the total amount you owe increases accordingly, as well as the monthly payments.
Consider the case of a British owner of an apartment in the eurozone over the past 18 months. Let's say the apartment owner had a mortgage of E300,000, with monthly repayments of E1,500. He makes his payments out of his salary in the UK, which is in sterling. At the start of 2007, E1 cost a mere 65p. By April 2008, E1 cost 80p. This left the apartment owner owing £45,000 more than he did at the start of the period, while his monthly repayments had increased by £275.
Rather than simply be tossed around on the waves of the foreign-exchange markets, it is possible to fix the amount you pay out every month. One possibility here is to take out a mortgage on your overseas residence in your home currency. You borrow the purchase price in sterling and convert that sum into the required currency at the moment of purchase. You then have a liability that is fixed in the same currency in which you earn money.
While this approach has obvious attractions, it may not necessarily be available to you. Lenders may be willing to do this in certain mainstream destinations, such as the Spanish costas. But for places that are a bit more off the beaten track, the option may well not exist. So, you may have no choice but to borrow in the local currency.
In such cases, you can also guarantee your repayments at a certain level by using a money broker. You simply sign a forward contract – an agreement to buy a certain sum in a foreign currency every month for up to two years' ahead. So, you might agree to buy $3,000 every month to pay your Florida mortgage for the next 18 months at a fixed rate of $1.95. Your monthly outgoings in sterling during that period will always come to exactly £1,538.46.
The beauty of this arrangement is easy to see. Say sterling collapses to $1.40 over the next few months. While a British holder of an American mortgage who did not enter a forward contract will now find himself paying out around a quarter more than he did previously, you will continue to buy your dollars at an advantageous rate. The flipside of this is that were sterling to go up against the dollar, you would not enjoy the benefits.
Forward contracts can also make sense if you're yet to buy your property abroad. Say you're due to retire in 18 months' time, at which point you are due to receive a lump sum. You want to relocate to a specific country, where you plan on spending a certain amount to buy a property. The risk is that if sterling depreciates against the currency of that country in the meantime, you may well be unable to afford the sort of property you were hoping to buy with your lump sum.
You could enter a forward contract today, agreeing to buy the value of your sterling lump sum in foreign currency at a rate determined today. The cost of doing this is paying a small premium to the current exchange rate. The larger the amount you're buying, the better the terms that you might be able to secure. Therefore it is always worth shopping around and being as forthright as possible when negotiating.
A word of warning here: foreign exchange services of the type we've discussed here are largely unregulated. This means that it is vital to do business with a reputable firm that is not likely to go bust or disappear. As well as going with a recognised name, it is definitely worth doing an internet search to find out other customers' experience of a firm. Inquiring about the company's procedures for protecting clients' money is also sensible.
Renting it out – what to watch out for
You may well be hoping that you won't have to fund the entire monthly payment on your overseas mortgage out of your UK salary. Particularly if you're not planning to occupy your property abroad yourself, you may expect to receive some rental income, quite possibly in the local currency if you're letting it out for the long term. But you might well find that the rent you receive is insufficient to cover the mortgage. Too often, landlords unrealistically assume they'll achieve consistently high occupancy levels and peak-season rental rates.
If your property is in a key destination city – such as Barcelona or Berlin – you may have little difficulty in finding long-term tenants. Likewise, if your property is in a great holiday resort where the market is well-balanced, you may also be able to count on a steady stream of short lets to holidaymakers. The problems arise when you own somewhere where there is already a glut of developments, such as the more built-up areas of Spain and France.
