The idea of owning ‘a place in the sun’ has been much popularised by the TV show of the same name, as well as a handful of other similar productions.
There are of course many reasons for wanting to purchase property outside the UK. Some have even seen it as the only realistic way to get a foot on the property ladder, particularly during the peak of the (comparatively) recent property boom.
But of course, few people are simply able to dip into their savings to fund the purchase of something as substantial as a home. The sharp truth is that unless you have sold a property in the UK, making a property investment means financing a property investment which in turn usually means borrowing the capital.
There are really only three realistic methods by which this can be done. The first, we’ll dismiss quickly.
That would be an unsecured personal loan and unless your monthly income is colossal, the short term coupled with the high interest rates dictate that this route is not really viable.
The second is possible only if you have substantial equity in the UK property you already own – and the terms would naturally depend on the lender.
You would essentially be borrowing against the current valuation of your home either by a second mortgage (likely to be expensive because the interest rate is usually higher and the term of the loan likely to be shorter), or by renegotiating a first mortgage. The larger loan would again be secured against your property and the only other factors to consider would be your age (simply because of the new mortgage term) and your ability to make the new, higher payments over the term.
This is certainly an option, but it is important to remember that it is your UK property, not the overseas one, that will be at risk if you are not able to fulfil your obligations to the lender. Few, if any UK lenders will secure loans on properties outside the country.
Thus it is important, particularly if you are older, that you think this option through thoroughly.
The third option is an overseas mortgage. Effectively, this just means that you would be taking on a first mortgage with a lender located in the country in which you want to buy a property – which sounds straightforward in principle, but there are a few things you need to consider before you embark upon this route.
Understand first that if you are borrowing in a foreign country, the lender’s options for redress should you default on your debt are reduced, generally down to the value of the property on which the loan is secured. So don’t be surprised to learn that you are therefore a higher risk and this will almost certainly be reflected in the interest rate you will be expected to pay, which is unlikely to be fixed.
In short, this means that you will be subject to the market forces of your host country. You will also be expected to provide a bigger deposit (typically 25 per cent) and your earnings and outgoings will be more rigorously examined (a 40 per cent disposable income threshold is not uncommon)
None of which means that obtaining an overseas mortgage is unwise, particularly given the considerably lower purchase prices of some overseas property. In fact, such a strategy can make sound financial sense.
It is simply important to consider the long-term financial implications very carefully.