Buying a property abroad is exciting, but as you’ve likely already realised, there are some challenges involved – with one of the biggest being financing a property in another country. To secure a mortgage for buying a property abroad, you might need to deal with different rules around lending, shifting economic conditions and also currency fluctuations.
Thankfully, there are some steps you can take to ease your journey towards securing mortgages when buying property abroad. From understanding the foreign mortgage market to mitigating currency exchange risks, here’s what you need to know.
Understanding the foreign mortgage market
Depending on the country you are looking to buy a property in, mortgage products and lending criteria can differ significantly from your home country. It’s important to understand the difference between the following types of mortgage, as well as which ones tend to be more frequent in your chosen market:
- Fixed rate mortgages: Have a set interest rate for the entire loan term.
- Variable rate mortgages: Have an interest rate that changes over time (i.e. become more expensive if interest rates rise quickly).
- Hybrid mortgages: Mortgages that have a fixed interest rate initially, but may adjust regularly.
Researching interest rates for your chosen market will be crucial, as the local economic conditions could be vastly different to the UK – higher inflation markets could drive up rates, in turn leading to higher mortgages, for example.
You should also carefully research the specific requirements of international mortgages – for example, some may require a different loan-to-value ratio, meaning that you would need to pay a bigger deposit than you would in the UK. Some may also require you to go through an international credit check or provide a high level of documentation, spanning personal documents as well as employment verification, tax returns and more.
Research and planning
Just like doing a mortgage application at home, you’ll want to spend some time defining your budget and goals before you get too far along in the process. On top of your property price, you’ll also need to consider any legal fees that might be required, taxes or any charges related to mortgages (for example, early repayment fees).
Affordability is the biggest factor for lenders, who will assess your application not just on your current income and situation but also based on how exchange rates and interest rates could change over time. That’s why it’s important when considering your budget to make sure it reflects the level of property you want but isn’t too ambitious.
It can help to make some estimates and put all the relevant figures into a spreadsheet or Excel document, with several different scenarios played out. That might make it easier to visualise which scenario is going to be best for you.
Choosing the right mortgage option for you
Every individuals’ situation is different, so it’s hard to recommend the perfect path to your international mortgage. Having said that, these are the most important questions for you to consider:
Do you pick a local or an international lender?
Local banks will know more about the local market, but they could have slightly more stringent requirements. On the other hand, international lenders that specialise in cross-border financing might be able to get you better terms.
Do you want to work with a broker?
Brokers can help cut down the time it takes for you to identify the best mortgage option based on your criteria, which can be particularly handy in a foreign market. However, just remember that brokers will charge a fee for their services.
What type of mortgage should you go for?
- Fixed rate mortgages can be more predictable, but you could end up paying more than you needed to if interest rates go down.
- Variable-rate mortgages may initially offer lower interest, but come with a risk of rate hikes.
- Longer-term fixed rate mortgages can cut fees, but give you less flexibility over time.
What are the fees and costs associated with mortgages?
Some of the fees you should look out for include:
- Origination fees: These are fees some lenders will charge specifically for establishing a loan.
- Insurance: In some countries, life insurance and/or property insurance can be required as a condition for the loan, so it's important to factor these into your overall budget.
- Fees for valuations/survey: Some lenders may need you to have a survey conducted to determine the properties’ value.
Preparing your mortgage application
Your lender/mortgage broker will likely tell you what documents you’ll need to provide for your application, but even if you’re still at the research stage its a good idea to put together a folder of your financial documents, bank statements and proof of income beforehand, or at least know how and where these things can be accessed.
You should also make sure that the personal details on all of these (e.g. your address) are up to date and that you notify any employers/friends or family you will be using for references that you may be calling on them soon.
You can also get a known international mortgage lender to create a mortgage in principle for you that will give you more purchasing power when it comes to negotiation.
Mitigating exchange rate and currency risks
One of the key challenges of paying a mortgage for a property abroad is in exchange rates, which can fluctuate over time. If you are being paid income in a different currency to the mortgage, think about how this may affect your repayments, as lenders will likely not make allowances for this.
Some international lenders or money transfer providers may offer multicurrency accounts that allow you to hold funds in multiple currencies simultaneously – this means that you can time currency conversions to take advantage of better rates, and therefore prevent losses due to fluctuations in the market.
Though many high street banks can charge high fees for sending large sums of money abroad (i.e. for a mortgage payment or for a deposit), a number of specialist money transfer providers can offer you significantly more competitive rates and lower fees – they can also provide hedging and FX risk solutions that help you manage currency risk over time. To compare how much it might cost to send money abroad with different providers, use our free comparison tool.
Legal and regulatory considerations
Laws and regulations around property ownership may differ significantly in your chosen market. It’s crucial to research and find a legal representative who has knowledge of the country’s laws around home ownership for foreigners, as each country will have rules specifically regarding property ownership by non-residents.
Aside from laws around mortgages specifically, you should also familiarise yourself with rules on taxation abroad, which could impact the amount you are taxed across both your home country and the country you are buying property in. For example, if you are a non-resident in the UK but you have UK bank interest, this income would be taxable in the UK.
These rules are often put in place to prevent people from avoiding tax by relocating abroad, but they can result in having to pay higher taxes depending on where you keep your money.
Recap on securing mortgages when buying property abroad
Below is a recap of some of the main points from this guide:
- Stay informed: Research your chosen market thoroughly, from laws and regulations around mortgages to economic performance to the cost of sending money abroad.
- Plan your budget: Figure out what you can afford while factoring other costs such as legal fees, taxes or charges for international mortgages
- Get help: Consider speaking to local legal reps or brokers with more knowledge of the area to get some guidance.
- Mitigate currency exchange fluctuations: Aside from interest rates, changing exchange rates can seriously affect the cost of your overseas financing – use specialist transfer money providers to help mitigate currency risk.
And there you have it: a complete guide to mortgages for buying property abroad. If you’d like to find out more about exchange rates or choosing the right money transfer provider to help support your buying journey, take a look at our personal guides.
