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» Foreign banks are after your mortgage
Published 2006-10-10
FOREIGN banks are hoping to muscle in on our appetite for second homes abroad, with two opening branches in London last week.
About 350,000 British people now own property overseas and Crédit Foncier, a French bank, last week opened a branch in the City to grab a slice of the action. It claims to undercut British banks that offer euro mortgages on French properties. Piraeus, a Greek bank, also opened up in the capital last week. This is likely to boost the popularity of Greece among second homeowners because, until now, it has been difficult to get a mortgage for Greek property.
Many brokers already deal with Crédit Foncier's French branches, and they said that while it does offer some cheap deals, British banks are also competitive and may have advantages over foreign banks in terms of their flexibility.
French banks do not always offer interest-only mortgages, for example, and they may not take rental income into account if you intend to let out your property.
Someone with a 20 per cent deposit could get a deal from Crédit Foncier that is fixed at 3.6 per cent for the first year, but it then switches to a variable rate, currently 4.7 per cent, for up to 20 years and redemption penalties apply for the first five years.
Alternatively, Barclays offers a 20-year euro mortgage fixed at 4.55 per cent for 20 years, which could offer better value over the term if you are prepared to pay slightly more in the first year.
Mike Boles at Savills Private Finance, a broker, said: "We use a number of different British and French banks. It all depends on the individual circumstances as to which deal will be the most appropriate.
Borrowers will not be able to walk into Crédit Foncier's branch, but it should make the process easier for brokers. Previously, all application documents had to be couriered to France and any queries would be handled by local staff.
When buying abroad, it is often possible to get mortgages in sterling as well as in the local currency, but advisers generally recommend that you opt for a loan in the currency of the country in which you are buying.
Boles said: "If you are living in Britain and earning in sterling, there is always a currency risk when buying a property abroad. But the risk is lessened if your debt is in the same currency as the property because it will always be directly linked to its value."
There is also the added benefit that euro interest rates may be lower than those on sterling loans because the European Central Bank's rate is 3 per cent compared with the Bank of England's rate of 4.75 per cent.
If you are buying on the Continent and opt for a euro mortgage, you will have to make monthly payments in euros. This will mean transferring money into the foreign currency, but most brokers, such as HIFX, 4xcc.com and Moneycorp, offer regular-payment plans that do this for you. And if your mortgage is with one of the British banks with a branch network in the foreign country, such as Barclays or HSBC, it should offer a similar transfer system.
Many people let their property out for some of the year, in which case they will receive an income stream in the local currency.
However, this is where you might hit problems with a foreign bank. The British mortgage market is one of the most sophisticated in the world, but in most other countries the choice is much more limited. For example, buy-to-let is virtually non-existent in France, so if you want to let your property, many French lenders will not take the rental income into consideration. French banks also have less flexible lending criteria, so if you are self-employed or don't have a regular income, it may be difficult to get a loan. You may also struggle if you want to borrow a large amount.
Boles said: "For the 1m-plus (£680,000 or more) market, we tend to use British private banks because they will lend cross-border and tend to be more flexible with their underwriting criteria. People borrowing this amount often have complex financial arrangements, so using a British bank is easier. With very large loans the deal you get tends to be bespoke, so rather than using a standard, off-the-shelf mortgage product, the broker will negotiate a deal with the bank specifically for you.
You should also take tax into account when considering your mortgage. For example, in France anyone with assets worth 750,000 Euros or more has to pay an annual wealth tax.
You may therefore choose to put down a smaller deposit than you were intending so there is a larger debt against the property, which reduces the chance of being caught by the tax.
It may also be worth opting for an interest-only loan, rather than a repayment scheme, so that the debt doesn't get smaller over time, but many French banks do not offer them.
Remortgaging can be more problematic overseas because some countries charge property taxes each time you take out a new home loan.
So, while the majority of people opt for short-term deals on their main UK residence, they often tie themselves in for a longer term when it comes to their foreign holiday home.
Check whether redemption penalties apply for the entire term. Barclays offers a competitive 20-year fix at 4.55 per cent if you have a deposit of 20 per cent, although you will be charged if you redeem the mortgage within that time.
You may therefore prefer a deal such as UCB's, which is fixed for one year at 4.3%. It then switches to a variable rate, which is currently 4.7 per cent for 19 years.
You do not have the protection of being locked into a fixed rate for the full term, but there are no penalties at any time.
http://business.timesonline.co.uk/article/0,,9553-2382450_2,00.html
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