Foreign mortgages: top 10 hidden pitfalls
According to Rightmove, a UK company, about 20% of Spanish and French, 25% of Italian and 35% of US clients buy property with a mortgage.
Taking out a loan is beneficial, especially in European countries: the interest rates in Austria, Germany, Switzerland and France rarely exceed 2% per annum, while in the US they run at 4%, and in emerging markets they reach 8% and above.
However, lower rates often imply hidden pitfalls: risks, restrictions and additional requirements imposed on foreign borrowers.
1. Currency risks
Most often, banks grant foreign borrowers with mortgage loans denominated in the currency of the country where the property being acquired is located. For instance, a Brazilian national receives a salary in real, buys property in Germany and takes out
Sometimes, EU banks issue loans denominated in the currency that is foreign to both the borrowers and themselves: the Swiss franc (CHF). In such cases the risks are even higher. As reported by the Guardian, between 2003 and 2008 many UK nationals were taking out
“When buying a commercial property,
2. Floating rate risks
Banks grant loans with floating and fixed rates. The floating rates change along with financial market indices (inflation, bond yields, interbank offered rates: Euribor and Libor) and the fixed rates remain stable during the whole loan term.
Many clients prefer floating rates, as they are lower, and so more attractive than the fixed ones. In Italy, for example, the average fixed rate is 3.5% per annum, while the average floating one is less than 3%.
Although floating rates seem attractive, it should be taken into account that the bank will alter the rate in light of the slightest change on financial markets. As a result, the loan may be impracticable. For instance, many Canadian nationals still remember how
“Fixed rates are higher, as they include the risk of the rate changing for the bank in the cost. With the floating interest rates,
3. Drawn out process
Another common risk is related to the fact that the period between applying for a mortgage and closing the transaction often takes months. Sometimes, the buyer applies for a loan in July, and the transaction is closed only in December. The procedure takes especially long when the mortgage
Buyers spend a particularly large amount of time opening an account needed to make a deposit, obtain a mortgage and subsequently pay the bills. “To transfer money to an account in Europe or the US, the buyer needs to explain the origin of funds. It is a rigorous procedure that can take several weeks or months. It is very likely that, without having amassed the funds in a foreign account in advance, you will miss out on an interesting offer,” George Kachmazov, managing partner at Tranio.com, says.
Daria, the buyer of an apartment
“We recommend resolving all issues related to money transfers and mortgages in advance. Specialized companies can assist in opening an account and making all of the necessary preparations even before you head out to the country for viewings and sign the sales agreement. We can send you in the right direction of who to speak to in which country," George Kachmazov says.
4. Limited loan maturity
The banks of some countries, for example, Germany and Switzerland often provide residents
The shortest loan terms
“The longer the loan term, the more expensive the money, but, at the same time, the lower the risk of the adverse market conditions affecting the lending terms.
5. Loan-to-value ratio limits
In Austria, the United Kingdom, Hungary, Germany, Portugal, France, the Czech Republic and some other countries,
Moreover, when buying commercial property, there is a risk that the bank will give even less than 50%.
The banks of some countries also issue loans based on the assessed property value, which can be higher or lower than the market one. "If the assessed value is lower,
“The more leveraged the property is, the higher the risks are. Furthermore, the higher the LTV ratio is, the less beneficial the rates become. We generally recommend taking out
6. Property value limits
The banks of many countries establish minimum and maximum loan amounts.
For instance, taking into account the minimum loan amounts and the maximum LTV ratio, in Italy, a property bought using a mortgage cannot be cheaper than €50,000, and, in Switzerland, such a property must cost at least €580,000.
|Country||Minimum loan amount, EUR, thousands||Maximum LTV ratio||Minimum value of property to be bought, EUR, thousands|
By contrast, in other countries mortgages are difficult to obtain to buy expensive property. For instance, taking into account the maximum LTV ratio, mortgages are not issued for purchasing real estate valued at over over €130,000 in Hungary, over €220,000 in Bulgaria and over €830,000 in Cyprus.
“German banks do not usually issue mortgages of less than €50,000. This means that buyers of real estate worth less than €100,000 can only count on obtaining a general consumer loan. In this case they can also acquire a loan against any existing property that they already own in the same country,” George Kachmazov says.
7. Loan denials to individuals
Sometimes banks turn down foreign individuals and legal entities but agree to lend to businesses that have been opened in their countries.
According to Kirill Schmidt, as of early 2017, loans are not available to non-residents in Germany, as the banking legislation demands that the banks only work with the German subjects. Therefore,
As denoted by Kirill Schmidt, the banks sometimes ask that individuals personally secure the loans issued to legal entities: “It is considered easier to recall a loan from an individual than from a bankrupt company. However, it depends
“When the banks refuse to lend to an individual, they can open a legal entity in the country where the property is located and register a mortgage to it. Registering the purchase to a company is beneficial for a number of reasons. For instance, this is an easier way of optimizing taxes when investing in commercial real estate,” George Kachmazov says.
8. Additional guarantee requirements
Banks often require additional guarantees from borrowers who are going to buy commercial real estate, as in these cases the loans are paid off with the rental income.
Andrey, a businessman from Odessa who bought two apartments in the Austrian town of Graz, told Tranio: “The bank asked for the same documents that we used to open an account as proof of funds. We also provided the bank with guarantee letters from the developer stating that the apartment was to be rented out and, even if a tenant was not found instantly, the developer will cover the rent and utility bills, so the bank did not face any risks. In the end, an Austrian bank offered us a mortgage for 50% of the property value at 2.5% per annum for 15 years. Obviously, we took it.”
“Please note that, in the case of commercial property, the bank considers it necessary for the rental income to cover
9. Permanent income requirements in the country
Some European banks require borrowers to have a permanent income in the country where they are going to obtain a loan.
Maria, a Tranio client who bought an apartment in Vienna, told us: “I applied to the two local banks I had already opened accounts with to obtain a loan. Both of them declined my applications for the reasons of being a foreign national and not having a personal income in Austria. As a result, I only managed to get a loan with a third bank when
“Banks always assess
10. Extra costs
At the time of taking out and paying off a mortgage, the borrowers incur a great number of expenses related to it. If you take these expenditures into account, the cost of the loan increases significantly.
|Costs||Amount||Are they obligatory?|
|Property appraisal anddue diligence||In some banks;optimizable|
|Bank commissionfor mortgage arrangement||Yes|
|Property insurance||Around 0.1% ofthe propertyvalue per annum||In many banks|
|Early repayment penalty||Not applicable in some countries (Cyprus, Latvia, Portugal, Finland) and if there is no early repayment|
“The only unavoidable expense is the bank fee. The other costs can be reduced. We recommend using mortgage broker services to do so: the brokers will help negotiations with the bank run smoothly and effectively, meaning you achieve favourable terms and interest rates for your loan,” George Kachmazov advises.
Despite the difficulties, taking out a mortgage loan to buy foreign property, especially for investment purposes, is beneficial for the following reasons:
- leverage: getting a loan can increase yields;
- options: more choice or larger properties become available;
- taxes: the interest rate is deducted from the profit tax base;
- quality: as they are subject to comprehensive bank examination, loans are only granted for good properties.
Yulia Kozhevnikova, Tranio