Buying a Holiday Home Abroad

Many people dream of having a home overseas: perhaps you want to buy a villa for holidays, or retire to sunnier climes. Or maybe you're planning to make a fresh start in a new country.

If you're buying a property abroad, you need to be clued up on how the process differs from the UK, from mortgages and tax to estate agents and bank fees. This guide explains the basics of buying a property abroad.

It covers:

• What are the best ways to find an overseas property?
• How do you get a mortgage for an overseas property?
• Watch out for exchange rate fluctuations
• What are the costs of buying abroad?
• Buying property abroad after Brexit
• The importance of independent advice

How to find an overseas property

There are several ways to start house-hunting:

• Online property portals

Property websites such as Rightmove, Zoopla and OnTheMarket have overseas sections. Certain high-end UK estate agents such as Knight Frank, Savills and Hamptons International also sell international property.

• Local estate agents

Local agents are worth a visit when you're on holiday in the region where you want to buy. Alternatively find someone through the Association of International Property Professionals. Ask how the property market has changed over the past few years and try to get insider knowledge about areas on the up – and those to avoid.

Of course, always take what an estate agent says with a pinch of salt – their job is selling you their clients' properties. Nothing beats walking around different neighbourhoods yourself and having a word with local residents.

• Exhibitions

Shows like A Place In The Sun Live bring estate agents, lawyers, developers and experts to you. You can normally attend seminars to learn more about the process of buying, meet people who've already bought abroad and arrange a trip to your dream location with an agent who will take you on a tour and show you potential properties.

• Developers

Developers sell newly built homes or off-plan properties that have yet to be finished. Research is required into the developer's reputation and recently completed developments.

We have all fallen in love with an area while on holiday, but it can be different when you actually live there. Knowing about access to shops, public transport and extreme seasonal weather is important.

You need to carry out exhaustive research – otherwise you risk the financial version of a holiday romance gone bad. Subscribe to magazines and websites devoted to expats in your country of choice. Ask lots of questions in forums.

You've probably earned a cocktail or two once you've finished your research

How to get a mortgage for an overseas property

Sadly, you can no longer expect to get mortgages for foreign property from UK high street banks. However, if you are a premier bank customer there could be exceptions on a case-by-case basis. Private banks in the UK may consider an overseas mortgage if the loan is over £1m.

So you generally need to arrange a mortgage with an overseas lender. Using a specialist broker will give you tailored information, including a list of estate agents or lawyers to use in your chosen country.

Minimum deposits needed for a foreign mortgage vary wildly. You need as little as 15% in France and as much as 50% in South Africa. It's 20% in Portugal but 40% in Croatia. Property in Australia, New Zealand and the US usually requires a 30% deposit (though it's 25% in Florida). If you can offer a higher deposit than the minimum, you may secure better lending terms, such as a lower interest rate.

Remember, foreign banks and mortgage brokers are not covered by the Financial Conduct Authority or the Financial Ombudsman Service, so guarantees and protections will vary according to the country.

There are always quirks to watch out for. In Thailand, for example, you are not allowed to buy land as a foreign national so you cannot buy a house and are restricted to purchasing an apartment.

You do not typically need a specific buy-to-let mortgage to rent out your property. If you do plan to let, check with a lawyer that it is allowed and whether you need a licence. France, Spain and Portugal are the most straightforward countries – but watch out for regional differences and requirements.

Watch out for exchange rate fluctuations

Make sure you consider the exchange rate as it can make your property purchase suddenly become cheaper, or more expensive.

Say you planned to buy a farmhouse in France for €200,000. In September 2019 it would have cost you £178,155, as the exchange rate was about €1.12 for every £1. But a month later, the rate had dropped closer to €1.11, which in turn raised the purchase price to £179,331, forcing you to stump up almost £1,200 extra.

If the pound dips further to €1.10, the homebuyer would be looking at a £181,818 price tag.

Exchange rates can be confusing to get your head round. For a British buyer, remember that if the pound goes down, the foreign property price effectively goes up.

These fluctuations will also affect your mortgage payments if you are paying from a British bank account. For example, on a €600 a month mortgage, an exchange rate of €1.12 to the pound gives a cost of £535. If the pound falls to €1.05, the monthly payment increases to around £570.

Think of a rowing boat. With a fair wind behind it, it can make light work for the people doing the rowing. A bit like when the exchange rate moves in your favour, and the house you're buying gets cheaper, hooray! But a strong wind against you makes rowing the boat harder – and in turn slows everything down as the property price or your mortgage bill has just gone up, ouch!

Exchange rates – like interest rates – are not something you can control. But, you can be prepared. Luckily there are a few safety nets that will protect you.

A forward contract is an exchange-now-pay-later deal that you can arrange with a currency broker. This allows you to lock in an exchange rate for up to two years, regardless of any future currency fluctuations. It may require you to pay a deposit, but it ensures you know exactly how much money you'll receive when you convert money or make an international payment.

Let's say you agreed to buy an apartment in Madrid today for €150,000, with completion expected in a few months. A forward contract would allow you to secure today's pound-euro exchange rate to use at an agreed date in the future. For example, if the rate today was €1.1135, that translates as a £134,710 price tag.

By using a forward contract you can lock in that exchange rate, and use it when you transfer the money to the property seller. It doesn't matter which way the exchange rate blows during that time – you have secured your €150,000 apartment for £134,710.

Meanwhile, a market order allows you to target a desired exchange rate and automatically convert your money when that rate is reached. This means when your target rate is achieved, your broker will exchange your currency then and there so you don't have to worry about monitoring the market.

You can also take out a regular payment plan, which helps you plan ahead by fixing an exchange rate for sending or receiving foreign money, for up to two years. It's a bit like a fixed-rate mortgage – you have certainty and confidence of knowing, say that your $100 monthly service fee for your villa in Florida will be fixed at £81, no matter what exchange rates do.

Of course, if the US dollar/pound exchange rate moves and the $100 is now worth £75, you lose out. But if the pound falls, and $100 becomes £90 you can breathe a sigh of relief that you only have to pay £81.

The costs of buying abroad

There are lots of costs besides the purchase price when buying a property overseas. Prepare yourself for the following.

1. Mortgage fees, such as mortgage broker fee, arrangement fee and administrative fee for the bank to appoint someone to manage payment of taxes and inscription of the title in the property register
2. Fees for a chartered surveyor
3. International bank transfer fees
4. Furniture, shipping and insurance costs
5. Legal fees to make a will, which may be obligatory in some countries
6. Translation fees
7. Connection fees for water, sewage and electricity plus utility bills
8. Rubbish collection or local equivalent of council tax
9. Any stamp duty and/or annual property tax
10. Income tax or income tax for non-residents
11. Service fees, if your property is part of a larger property development
12. Fees for a financial adviser to manage your tax affairs, if you wish to use one. You may also be liable to pay tax if the property is sold.

Property taxes will differ from country to country so seeking legal advice to find out exactly what you'll have to pay is essential.

If you're renting the property out, you will have to pay tax on the income, and when you sell there'll be capital gains tax, unless the property is your main home. In most cases, international agreements known as double-taxation treaties exist to ensure that you aren't taxed twice – at home and abroad.

When making an overseas property purchase, it's likely you'll need to pay in the local currency. Do not make the mistake of going straight to your own bank for currency transfers – as its exchange rates will probably be rubbish. Brokers such as TransferWise, FairFX, Caxton FX, Moneycorp and Fexco are likely to offer a better rate than the bank or building society where you hold your current account.

So carefully check the fees and exchange rate for money transfers. Even if the broker's fee is higher, a better exchange rate could save you hundreds – if not thousands – of pounds when transferring big sums of money abroad.

Using a British credit card that charges no, or low, currency conversion fees is a good option when paying bills abroad.

Buying property abroad after Brexit

Brexit has a big impact on how much it costs to travel or live in EU countries. If you are thinking about buying property abroad there are two factors to consider: tax and restrictions on stays.

UK citizens who do not already live in the EU are restricted to spending 90 days in the bloc within any 180-day period. Passports will be stamped on entry and exit. If you are found to have stayed too long you could be sent home with an "overstay" stamp on your passport.

This might not be important if you buy a holiday home and want to stay there for a few weeks at a time. However, if you usually spend several months of the year in your property abroad you will have to consider how you will work around this rule.

The EU's 27 members have always set their own taxes, and Britons with property interests abroad have mostly been governed by separate bilateral treaties. These are largely unaffected by Brexit and ensure that British residents are not double-taxed by two countries on their income and gains.

However, these treaties do not cover everything. Some EU countries have different tax rates for non-EU citizens in certain circumstances.

Now that Britain has left the EU, Britons there will liable to pay higher tax in some circumstances.

Spain

Properties in Spain still seem to dominate television shows about moving abroad. If you have a holiday home in Spain and let it out for some of the year while you are back in the UK, be aware that you must pay 24% on rental income rather than the 19% that applies for owners from EU nations.

The Spanish taxman does not allow non-EU property owners to deduct any expenses either — this is a benefit granted to EU citizens — so you will have to pay tax on your gross rental income.

If you're an expat selling your main home in Spain, you would have previously been exempt from capital gains tax (CGT) provided you were relocating within the European Economic Area. Now you will pay a CGT rate of 19%.

France

If you have a holiday home in France that gives you a rental income you will now face an increase in social charges — a group of four or five costs similar to national insurance — from 7.5% to 17.2%.

Italy

If you go through divorce with an Italian and there's property involved it is now more expensive for Brits since leaving the EU. When someone transfers the ownership of their Italian home to another person the new owner is liable to pay a "transfer tax", which ranges between 2%-9%. If the transfer results from a divorce this tax is not payable if the recipient is from an EU country. Brits will no longer enjoy this exemption.

The importance of independent advice

You may have heard horror stories of buyers whose overseas property adventures come to a sad end when developers disappear, holiday homes are demolished and costly legal battles rear their ugly head.

An overseas property purchase is not regulated by the Financial Conduct Authority (FCA) so you'll not be protected by the Financial Ombudsman Service or Financial Services Compensation Scheme if things go wrong.

It is vital to seek independent legal advice from a lawyer who is not associated with anyone else involved in the buying process such as the seller, the estate agent or the developer.

You need an English-speaking lawyer who is fluent in the local language and understands property law in the country where you're buying – plus how the law relates to non-residents.

If you're appointing a UK legal firm, check they're registered with the Law Society of England and Wales, or the equivalents in Scotland or Northern Ireland, and that they also specialise in international transactions and property conveyancing.

You can find English-speaking lawyers and translators by contacting the local British Consulate.

You can find a financial adviser at MyLocalAdviser or Unbiased. An independent overseas property specialist can also be an excellent source of information, such as Simon Conn.

To find out more, from mortgages to tax implications, read our Q&A on buying a property abroad.

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Source: https://www.thetimes.co.uk/money-mentor/article/guide-buying-property-abroad/

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