Could taking a mortgage on a foreign property be better than using cash?
Buying a property abroad is an exciting prospect for most people. Whether it is for use as a holiday home, or as a place to relocate while still keeping your main residence as a backup, you will need to think carefully about how to finance it.
There are many advantages of taking out a separate mortgage specifically for the foreign property, rather than re-mortgaging your main residence in order to release equity.
Firstly, you are keeping your home as free of mortgages as possible. If things go wrong for any reason and you cannot afford to pay back the second mortgage, then your overseas property is at risk, rather than your main residence.
Also, as the value of the property and the mortgage arranged are normally in the same local currency, there is less currency exchange exposure.
"Things went awry for buyers in Cyprus"
Things went awry for buyers in Cyprus a few years ago when taking out a mortgage in Swiss Francs was common as the exchange rate and interest rates worked in their favour. But when things went in the other direction, it left thousands of British property owners who were earning in Sterling facing financial burden and, in some cases, the risk of losing their UK home as they could not afford the repayments.
If you are renting out the property, it also makes sense to source a mortgage in the same currency, as this means that the income will be in the same currency as the mortgage. However, if you are paying back the mortgage using Sterling, then you can use currency dealers to fix the exchange rate so that you can minimise the exchange rate loss when paying the mortgage.
"Lower inheritance tax liabilities"
When it comes to inheritance tax liabilities, the mortgage could possibly be used to lower these and, in some cases, reduce income tax on the rental income in that country, meaning you can use a mortgage as a tax planning exercise. You should consult a local lawyer and tax specialist (plus your financial advisers) to check how these could be effective for your own personal financial circumstances.
An added bonus of taking out borrowing in that country means that the local bank will also do its own legal and valuation checks on the property. This acts as an additional benefit to the work that your lawyer undertakes, although it should not be used as a substitute for taking independent legal advice.
Our thanks to Overseas Property & Finance Specialist, Simon Conn, for this article. Simon is a member of the AIPP and has over 35 years broking experience in the overseas property market. Simon can source residential mortgages (purchase and re-mortgage) in over 50 countries. Please click here for further details.