Q: Do I need a (Property) Financial Advisor?

Financial advice.

A surveyor can stop you buying a 20-bedroom French chateau which is actually close to becoming a 20-bedroom French heap. A translator can prevent you from signing a document which says ‘I, the buyer, give all my money to the owner of this heap and expect absolutely nothing in return'. Yet there is one more advisor who may prove equally invaluable – a financial advisor.

Financial planning is an integral part of buying property and can be a complex topic. Few people will be able to pay for a property with a single lump sum, leaving the majority of buyers at the mercy of stage payments, international mortgages, currency fluctuations, varying tax regimes and more.

Financial and taxation regimes vary widely and taking advice based on your individual circumstances is critical. This is something to think about before beginning to look seriously; deciding how to share the tax burden and under whose name to register the property have significant financial implications. Most financial advisors will be able to help you plan for your domestic financing options and liabilities, but there are also firms specialising in the international market.

Financial Considerations.

Part of the appeal of investing in overseas property is that it is interesting, exciting, even ‘sexy'. However, when it comes down to it, it is the relatively dull aspects of finance which determine the success of the venture. Considerations of financing, exchange rates and taxation can make the difference between profit and serious financial headaches.

The reality is, however, that with a little forethought the financial aspects of investing abroad can be taken care of quickly and simply. The three areas that need consideration are: being aware of the additional costs involved (both in terms of upfront costs and taxation); making adequate provisions for currency risks; and selecting the best financing option.

Calculating the final rather than the asking price.

Most experts advise adding 10% to your budget in order to cover taxes, fees and unexpected expenses. However, making general assumptions of the cost is dangerous. Underestimating the costs could mean that you have to find extra money for the purchase once you have committed. This could be difficult, especially if the amounts involved are in the thousands. Equally, overestimating the costs could mean that you pass up an excellent opportunity because you assumed the purchase costs were higher than they were in reality.

Broad percentage estimates are simply not good enough and aren't actually necessary. Any agent will be able to give you an accurate breakdown of the costs involved and you should request this if it is not volunteered. Some of these costs, such as stamp duty, will often be derived from a fixed percentage of the property value. Others however will be fixed fees, regardless of the property price.

The best approach is to have a list of all potential, additional costs and write down the actual figures for the property in question. If you have access to Microsoft Excel or another spreadsheet programme use this as it will enable you to easily calculate the absolute values of percentage costs and to add all of the costs together. Holding the information in a spreadsheet makes it easier to compare the total costs of several investment opportunities at once.

As a guideline, the list below shows many of the potential additional purchase costs that you may encounter:

Stamp duty/purchase tax
Agent's fees
Lawyer's fees
Translation fees
Survey fees
Mortgage arrangement fees
Notarisation fees
Travel costs
Bank set-up fees
Currency transaction fees.

Financing your purchase.

When it comes down to it, you only have two options for financing your overseas property investment: use your own money or someone else's, such as the bank or even the developer themselves. Gearing your investment by using the bank's money to finance your investment is the ideal situation as it reduces your cash requirements and actually improves your return on investment from a capital gains perspective. If you decide not to use your own money to finance your purchase then there are three options available:

To raise a mortgage on the property you want to buy.
To re-mortgage against another property that you own already.
To find a property where the developer is offering delayed stage payments.

International mortgages: raising a local mortgage against your investment.

In many ways, raising a local mortgage for your property is ideal. One of the main benefits of financing your purchase this way is that your borrowing and repayments will be in the same currency as your rental income meaning that currency fluctuations will have no impact on your ability to make repayments.

Having a mortgage abroad will also make you feel more secure as your other assets will be left out of the equation. This creates a balance between assets (the property) and liabilities (mortgage debt) which is important. If you fall behind on payments the investment property is the only asset places at risk.

However, in many countries the mortgage market simply won't be developed enough for you to be able to get a mortgage there. Mortgages might not be available to foreigners (or even at all). If mortgages are available they may have restrictive lending criteria of prohibitive interest rates.

Outside the Eurozone, where interest rates were around 5% at the time of going to press, most places have higher rates that the UK or US. In places such as South Africa and Ghana rates are often much higher – 12%in Ghana and 15.5% in South Africa at the time of writing. Rates like this will heavily erode any rental income. Lending conditions are also tighter. The amount that will be lent will often be less than in more established markets. Typically, banks will lend no more than 80% of the property value, although this is changing as the overseas mortgage market becomes more established. Repayment terms will also be shorter than the 25 – 30 years that many investors are used to. Often repayment terms will be between 10 and 15 years – again, though, this is changing as overseas property investment becomes more common. This significantly increases the cost of monthly repayments. There are often restrictive age limits on lending, making it difficult for anyone over the age of 60 to borrow.

As a general rule, the more ‘emerging' a market, the less likely it is to have a developed mortgage system. Buyers can easily borrow in order to buy in Western Europe, the US, Australia and parts of the Caribbean, but in countries outside of these areas it can often be a different story. A first step to finding out whether mortgages are available in the country you want to purchase in is to ask an agent dealing with that area. Agents realise the value of mortgage financing to investors and will be very keen to let you know when it is available.

Alternatively, there are some financial services companies which specialise in arranging mortgage finance overseas. It is worth speaking to them as they sometimes manage to arrange special deals on mortgage financing in countries where it is not usually available to foreigners.

Countries where it is possible to borrow locally include:

Albania, Andorra, Australia, Austria, Belgium, Bosnia, Bulgaria, Canada, Caribbean, China, Croatia, Cyprus, Czech Republic, Estonia, Finland, France, Germany, Ghana, Greece, Holland, Hong Kong, Hungary, India, Ireland, Israel, Italy, Latvia, Malaysia, Malta, Montenegro, Morocco, New Zealand, Panama, Philippines, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Turkey, UAE, USA. There are more being added all the time.

Advantages of a developing mortgage market.

A developing mortgage market is one of the most reliable indicators that a country is on the way up. Without a developed mortgage market there is a limit to how far prices can climb. Where there is no mortgage market, the majority of transactions are in cash, purchasing power remains low, and prices stay artificially low. Turkey is a good example of a mortgage market which has just taken off. Previously, interest rates have been as high as 22.5% and repayment terms were 60 months for loans in lira and 180 months for loans in foreign currency. Mortgages are now readily available from a number of banks with interest rates from 6.4% over a term of 20 years. Re-Mortgaging to finance an overseas investment.

Another option is to re-mortgage your home or other properties that you own in your country of residence. This has become relatively common practice in countries like the UK and Ireland where house prices have risen dramatically, giving people access to large amounts of equity.

The advantages to this approach are that you will be able to arrange finance before you find a property abroad, meaning that you will be ready to process when necessary. You are also likely to have an established credit rating and be familiar with the borrowing process making it far less complicated than raising finance abroad. There is also the issue of interest rates which in the UK and US have been relatively low in the past. Because you will be borrowing against the value of an existing property, you may also be able to finance 100% of the purchase cost of the overseas property, giving you 100% gearing.

The downside of borrowing at home is that you may be exposing your main residence to risk if you fail to meet your repayments. There is also the currency risk. If you are letting out the overseas property, you will most likely be receiving rental income in the local currency. However, your repayments will be in your domestic currency. As the values fluctuate between the two, your rental income may drop relative to your mortgage repayments, making it harder to meet the repayments.

Whether you raise finance domestically or internationally is a personal decision which should be make in light of careful consideration of all of the benefits and risks. If you are unsure which option suits your needs best, speak to a professional financial advisor who can help ensure that you make the right decision.

Developer financing.

A potential alternative to mortgage financing to watch out for is developer financing. In areas where finding a mortgage can be difficult, some larger developers may offer financing or deferred payment schemes. Confident developers may agree to take money in regular instalments, bringing apartments and villas within the reach of more people. To all intents and purposes developer financing works like a mortgage although developers don't always charge interest.

Deferred payment schemes are different from stage payments. Stage payments are a limited form of financing where you pay for the property in stages until it is completed and you take ownership. Deferred payment schemes include stage payments but the stages continue well beyond the completion of the building. A typical deferred payment scheme would allow you to pay chunks of the property prices at regular intervals over a seven-year period even though the property is completed and you are given ownership within two years.

‘To all intents and purposes developer financing works like a mortgage although developers don't always charge interest'.

Developer financing is of course a marketing strategy that helps the developer sell more properties. In instances where the developer doesn't openly charge interest on the deferred payments, you may find that they have added a premium to the purchase price. Check this by comparing similar properties without developer financing. Adding a premium for this form of payment plan is perfectly reasonable and should be expected; just make sure that the premium isn't excessive and you are not paying over the odds.

Tips for financing a property

If you are arranging finance on the property, ensure that this is stated in any contract and you have an ‘opt-out clause' if the loan is not agreed (which will ensure any deposit paid is refunded).
Have mortgage financing arranged before agreeing to purchase, or before signing contracts and paying a deposit. This will help you to avoid delays and difficulties should your application be rejected.
Open a bank account in your chosen country and ensure you get a Certificate of Importation for the money you bring in from your home country. This will make repatriation of funds much easier.
Set up standing orders in a local bank account to meet bills and taxes. Failure to pay your taxes in some countries, such as France, Portugal and Spain could lead to court action and possible seizure of your property.
Consider using a specialist overseas mortgage broker – this will be invaluable when dealing with the red tape associated with foreign banks and as previously mentioned they will be able to negotiate better rates and terms.