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Buying Property Abroad


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Buying property abroad is no longer the preserve of the wealthy elite. The number of Britons owning second homes abroad now stands at 257,000 (Source: National Statistics) - and this number is only set to grow. Research from currency exchange specialist, HiFX suggested that 29 million Brits would like to buy a property abroad and predicts, perhaps optimistically, that 11 million could actually own one by 2011.

Why are more Brits buying abroad?

The reasons for the surge in interest are clear to see. Not only is the world considered to be a smaller place these days, with budget airlines introducing new destinations to their portfolios all the time it's also cheaper to get around.

The introduction of the Euro in 2002 and its further expansion has also made it easier to compare prices of property. The widespread use of the internet now means people can view and research foreign property from the comfort of their own homes, in their own time - and perhaps most importantly - virtually free of charge.

As property is cheaper in many countries outside the UK, overseas homeownership has also become more viable in recent years.

But, regardless of money and travel opportunities, one of the basic primary motivations for buying abroad is that British obsession, the weather! Currency exchange specialist, Foreign Currency Direct (December 2007) questioned the 94% of Brits they found to feel 'down' during winter and asked what measures they would take to combat their winter blues. While many respondents (42%) said they would opt for the short-term solution of heading off on holiday, over a quarter of the population (28%) said they would take the radical step of permanently moving to a country with a warm climate. And one in four (26%) would like the best of both worlds by staying put but buying a holiday home abroad.

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What are the pros of buying a home abroad?

It is true that property in some of the more traditional locations of France, Portugal and Italy is no longer shooting up in value and in Spain, prices have actually dipped on the Costas due to oversupply and issues with the legalities of building in some areas. Even some of the less well-trodden countries that only joined the EU in 2004, such as Cyprus and Hungary have seemingly reached a pricing peak.

However, it's a big world and there are still some emerging countries that could see significant potential growth, including Brazil, Malaysia, Argentina, Poland and India. Bulgaria and Romania, being more recent members of the EU, joining on 1 January 2007, may also be good bets. But it will not just be the property's equity that is an investment.

If you choose the right location and situation for your overseas home, you can also generate rental income from holiday makers increasingly keen to avoid hotels in favour of the flexibility and space that a self-catering apartment offers.

Of course, a home abroad can also be used as a base for your own family holidays which means you don't have to pay for the cost twice.

Thinking of buying abroad? Do you need to transfer currency overseas?

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What are the cons of buying a home abroad?

If you want to buy a home abroad, it is imperative that you do your research first as property laws vary enormously between countries, which some unlucky - or just unprepared - foreign buyers can discover all too late.

For example, in Slovakia there are restrictions placed on non-residents who want to buy within agricultural or forested land; in Montenegro while your property might be owned on a freehold basis, the land itself will be leasehold.

In Spain, it is the property, not the person, which is a debtor. This means that any new owners who have not carried out the correct paper work may suddenly find themselves in some deep financial hot water.

In Croatia, the property market remains volatile after the war of the mid 1990s which left behind many disputes about land and property ownership.

Similar disputes may resurface in Northern Cyprus. The internationally unrecognised Turkish Republic of Northern Cyprus (TNRC), which was created after the Turkish invasion in 1974, is taking slow but notable steps towards reunification - some 163,000 Greek Cypriots may return to claim their abandoned property as a result.

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Is it a good idea to buy off plan?

Buying an apartment off plan may be cheaper than buying an existing property with developers offering bargains in order to create cash flow to allow them to build the next stage of the block. You will also usually only be required to make stage payments on off plan homes over the course of say, one year, which can help ease your initial expense.

However, there are pitfalls too. It is nigh on impossible to oversee the project from the UK you will have to resign yourself to the fact that colours and materials might not be as you envisaged. Disappointment may be just a short flight away!

You will also need to bear in mind that the cost of the actual property is just the start your costs. Monthly, quarterly and annual expenses will be payable such as service charges, ground rents, repairs and maintenance to the shared spaces of the block and communal cleaners - and that's before the cost of maintaining the inside of your own property is even considered. Make sure you factor in all your likely expenses when doing your sums.

If you are then looking to make your property 'pay for itself' by renting it out to holiday makers, you will need to look at any restrictions that might apply - even if it at first appears quite simple. For example, in Florida, Disney attracts more than 40 million tourists a year and claims 365 days of sunshine. However, in 1990, the state government introduced 'zoning restrictions'. These set down minimum terms of tenancy from area to area and even street to street in a bid to avoid constant disruption to native residents - something you certainly need to know about in advance.

It is imperative to seek out independent legal advice before you make any commitments with a developer, agent or vendor with an English speaking lawyer.

Travelling abroad ? Check out our tourist rate guide to see how much your pound will get you.

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How can I raise the money to buy overseas?

The majority of buyers draw on accrued equity stored up in their UK homes to raise the money to buy abroad - and according to figures from Halifax, there is potentially plenty of it.

The Halifax House Price Index shows the price of an average property in the UK rising to £197,039 in December 2007 from £69,889 in December 1997, a staggering 282% gain.

This has meant that even the 'average Joe' could be in a position to release the equity from their UK home to use as a deposit on an overseas property or even to buy their second home outright for cash.

However, this will mean taking a remortgage for more than your existing UK loan or organising a straightforward further advance, which in either case, will result in larger monthly repayments.

Nationwide, Halifax and estate agents' body, the Royal Institution of Chartered Surveyors, are all forecasting flat house prices for 2008, while others believe prices will actually fall. This means there is no longer a guarantee that your property - at home or abroad - is going to carry on rising in value. You should think very carefully about extending your borrowing. There is little point having a holiday home abroad if you can't afford to maintain it, or even to pay for a flight out there!

Are you looking to remortgage to fund your holiday home abroad?

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How can I take a mortgage on an overseas home?

If you need a mortgage to fund your holiday home, it is likely that you will have to go to a lender based in that country. UK lenders tend only to lend money on property that is built on British soil.

At first, this can sound pretty daunting, but do not despair! Many UK mortgage lenders have operating subsidiaries abroad, offering mortgages and other financial products to UK holiday homeowners and expatriates. Halifax, for example, offers mortgages in Spain to UK borrowers through Halifax Espana.

Specialist UK mortgage brokers have links with overseas lenders and may be able to act as an English-speaking broker on your behalf. Using a professional is imperative in these circumstances as there are several foibles and quirks of lending that occur from country to country.

In Italy for example, a bank will only lend if the property is habitable. This means sanitary facilities, a roof and clear access. If the property you are buying is a renovation project, this caveat can cause problems as it will mean the cost of carrying out the work has to come out of your own pocket before you can get a mortgage.

In Spain, the property will usually have to be registered as a habitable dwelling (a 'vivendas') for a minimum of five years. In some Caribbean countries like Jamaica, it is nigh on impossible to get a mortgage - and if you do, interest rates are charged up to an eye-watering 22%.

In other countries, like Northern Cyprus, mortgages are only available for 15 years, which - although this means you will be 'mortgage-free' earlier, also results in a steeper payment in the mean time. And in some countries, such as Slovenia, it is not yet possible to get a mortgage at all, which means any 'bad investment' will hit your pocket - and only your pocket - hard.

Need an overseas mortgage for buying abroad?

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How do the mortgage lending criteria work?

Even when you do not encounter these problems, lending criteria of overseas banks for foreign nationals is stricter than you may encounter at home. Instead of using income multiples, lenders employ an affordability criteria. For countries in Europe this will typically state that all your monthly outgoings - including your residential mortgage, loans, bills and even school fees together with your foreign mortgage repayment - must not exceed 35-40% of your entire net monthly income.

It does not take a genius in mathematics to realise that this means either you need to earn a lot or have minimal mortgage and debts. You will also need an average 20% deposit while in some countries you may be required to fund a 50% deposit.

The types of mortgages available are also more restricted. Sheltering from interest rate rises by taking a fixed rate deal for example may not be possible in some countries.

Moneyextra's mortgage calculators can help you work out what you can afford.

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What do I need to know about currencies?

You can usually choose which currency you want to borrow in, depending where you buy. Euros, Dollars or Sterling are the most common currencies. However, if you do not borrow in Sterling, the interest rate you will be charged may bear little relationship to interest rates in the UK. If you are borrowing money in a foreign currency you also lay yourself open to potentially adverse movements in currency rates which could see your monthly mortgage costs rising sharply

It can take up to 20 weeks to complete on a property and currencies during this time can fluctuate; especially with volatile currencies like the South African Rand, this can mean paying several thousands more than you anticipated for your property. This problem is compounded when it comes to making stage payments on off plan properties as large sums of money will have to be transferred five or six times.

One way to minimise your risks may be to use a currency exchange specialist, rather than your bank, when transferring money. Not only will the transfer be likely to be cheaper but you can also fix the cost of funds at an exchange rate you can afford in advance - or instruct the company to buy your money when the exchange rate hits a certain level.

Pounds and pence into dollars and cents? Moneyextra's Currency Converter can tell you what you will get.

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What UK taxes are payable on overseas property?

If you are a UK resident, you will have to pay income tax on any rent received from a property, regardless of the country's soil on which it is built. This will be payable at your marginal tax rate but it's important to be aware that any extra income could push you into the higher rate tax bracket if you're a standard rate taxpayer.

As your overseas property is not your primary residence, when you come to sell your home abroad, you will also be liable for Capital Gains Tax (CGT) on any profit made from the sale, although you may offset your CGT annual allowance against this (£9,200 in 2007 / 08). The property will form part of your estate on death, which means that Inheritance Tax (IHT) may also be payable.

If CGT and IHT weren't complications enough, the UK has what's known as a 'double taxation agreement' with certain countries such as France, which stops UK residents from paying some taxes twice on property and income from abroad.

This is where it starts to get a little complicated so seeking independent tax advice from an English-speaking professional is a must. Before you do, however, you may find it useful to take a look at what the International Manual (DT50) on HM Revenue & Customs website has to say.

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What 'native' taxes are payable on overseas property?

Clearly, this will depend on the specific country. There is no globally-set method of taxation.

Believe it or not, some countries in the world make the UK look like a tax haven! In Australia for example, Stamp Duty is payable at up to 4% on the purchase price of the house but can be payable on the mortgage too. An additional 'and tax' can then be charged at up to 5% of the value.

In South Africa, 'transfer duty' is payable at 5-8% of the property value, compared to stamp duty land tax of 1-4% in the UK. However, VAT is payable on some properties instead of transfer tax at 14%! And that's before you consider the South African Stamp Duty that is payable on all mortgages at 0.25%.

On the other side of the coin, however, some countries make the UK property taxes and costs appear crippling. Florida has one of the lowest property taxation systems in the world. If you are taking a mortgage, all taxes and buying costs will amount to no more than 4% of the property value. If you are buying cash, it will not be higher than 1%.

Buying in Dubai will cost you even less. The emirate is totally tax-free in terms of both property and income. However, as it can be difficult to secure a mortgage and the cost of living is equivalent to that of central London, so you will likely need all the spare cash you can get your hands on!

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What 'hidden' costs are there?

As you are dealing with the unknown when buying a home abroad, you will need to enlist a lot of professional help and support - and that costs. Even if you have found your perfect home online, it is still likely to involve a property agent. Commissions vary but budget for in the region of 1% of the final sale price.

You will also need to involve a mortgage broker who could charge a similar fee as well as a lawyer who is experienced in the conveyancing processes of that country. Be sure to ask for the costs and fees upfront - even fix them if you can. This way, even though you may feel you are entering the unknown, at least it won't be as dark.

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

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Are overseas property providers regulated?

In 1973 a voluntary regulator of the UK overseas property industry called FOPDAC (Federation of Overseas Property Developers, Agents and Consultants) was launched. In late 2007 this body merged with the National Association of Estate Agents (NAEA).

It is a good idea to ensure that when involved in any overseas property transaction, you use a NAEA registered agent - and, again, even more crucially, an English-speaking lawyer.

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13 February 2008 © Moneyextra.com

 

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