Mortgages for foreign properties
As the foreign property buying spree continues unabated, borrowers face the question of whether to borrow in sterling or the local currency.
With base rate in euro-land still at only 2%, compared to 4.75% in the UK, a euro mortgage might seem attractive at first sight.
But if you take a euro mortgage, you have to be prepared for exchange rate volatility and if you are self employed, you may not even be eligible for a euro mortgage, as few European lenders allow self-certification of income.
It’s normally simpler to take out a mortgage on the back of the equity in your UK property, even if this may be slightly more expensive.
Minimising the exchange risk
That said, if you are paid in the currency of the country where you are buying, or expect to receive rental income from the property, having a mortgage in the same currency will minimise the exchange rate risk.
But although base rate in euro-land is only 2%, the profit margin on Euro mortgages is much wider, so the interest rate differential compared to the UK is not as large as you might expect.
European lenders will also take into account your UK mortgage debts and other outgoings and Spanish lenders won't lend to you if your existing loans amount to more than 35% of your income.
Furthermore, despite a common base rate of 2%, mortgage rates across the EU vary considerably.
For instance, French mortgages for UK borrowers start at 3.5%, Spanish ones at 2.75% while Italian banks will lend to UK borrowers from 3%. In Ireland, mortgages can be obtained from as little as 2.54%, but in Greece they start at 3.2%.
Maximum loan to value in these countries tends to be 80%, while in Cyprus, outside the euro zone, it is only 70%. A growing number of UK and Irish lending institutions are also offering euro mortgages, so it is worth shopping around for the best deal.
Different market, different costs
There are also multi-currency mortgages which switch between a basket of currencies to take advantage of exchange rate movements, the aim being to reduce the value of your debt more quickly than would normally be possible. But these mortgages are high risk and not suitable for everyone, as monthly repayments can fluctuate considerably.
Katherine Elphick of Moneyextra Mortgages comments, "When buying a foreign property, it is just as important to take expert advice as the range of options may be greater than if you were buying in the UK."
The cost of buying and selling property abroad tends to be much higher than in the UK. In France and Spain, expect to pay an extra 10% of the property's value in costs.
Also, be prepared for the ongoing expense of maintaining the property - utility bills, service charges, community and local rates can be just as expensive as in the UK. France and Spain also have various wealth taxes based on the value of your property.
If you choose to rent out your holiday home, check the tax position on rental income. It may be possible to offset the mortgage interest against the tax on rental income, but you need specialist tax advice, as some countries have double taxation agreements with the UK.