Investing in a holiday home

Buying a place overseas is becoming an increasingly popular investment. According to a survey from American Express Travel Insurance, nearly one in three of us is considering purchasing a property abroad. The number of people in the UK who own a home abroad has increased by 85 per cent in the last ten years; three-quarters of a million now own a property in Spain and half a million have a place in France.

Top of the property wish-list are still France and Spain, followed by Italy and the USA, but there’s been a marked change in the market in the last few years, with investors plumping instead for Eastern Europe and farther afield. Bulgaria has seen a huge rise in popularity and investors are also snapping up places in Dubai.

Holiday homes can be lucrative investments, combining capital growth with rental income, at least for a part of the year. Tourists are prepared to pay high rents in season, and short-term tenures usually fall outside the remit of the tenure and rent-control laws. Many older people also choose to buy a place to retire to, usually in southern Europe for the warmer climate.

Financing it

There are key decisions to make when buying abroad and it’s important to do your sums carefully from the outset.

If you’re not in a position to buy outright, the first consideration is likely to be your mortgage. Many borrowers remortgage their UK property to finance a property abroad. You can get mortgages from the international division of a lender in the UK – including HSBC, Halifax and Norwich & Peterborough – or a bank local to the property you want to buy.

“ One advantage of a local bank is that a local lender will also help you with the transaction,” says Simon Conn, managing director of Conti Financial Services. “They can advise you on the process, such as getting the right surveys. But it’s vitally important that you deal with a recognised lender and get proper legal advice before you buy.”

Foreign-currency mortgages

Borrowing money can be cheaper outside the UK. The interest rate in Europe is currently around 3.4 per cent, compared to a standard buy-to-let mortgage in the UK of at least 5 per cent. In Bulgaria the rate is more like 7 per cent.

Ian Smith, head of European Operations at Halifax plc, points out that taking your loan in the local currency can make sense if you are being paid rent in the local currency, for example.

He says: “Mortgage rates in the rest of Europe are lower than in the UK at the moment and have been for some time, so it makes sense to take advantage of that. But if you take your loan in the local currency, remember that your monthly repayments have to be in that currency.”

If you’re selling your home in Britain and retiring abroad, you can generally get a loan of up to 85 per cent of the value of the property. However, if you’re keeping the one at home, it’s likely you won’t get a loan higher than 75 per cent of the value.

Your mortgage isn’t the only time you need to think about currency. When you’re buying a property, the price will be in the local currency and so will fluctuate in line with exchange rate movements. Once your offer is accepted, by the time you come to complete on the deal, the property will either have become cheaper or more expensive depending upon the currency movements.

For example, if you agreed to buy a #200,000 property in Spain in June 2005 when the pound/euro rate was 1.51 it would have cost £132,450, but by mid July when the exchange rate fell to 1.44 it would have cost an extra £6,483.

Alexander Wright, director at currency broker HIFX Private Client Services, says: “This risk is avoidable if you buy a ‘forward’ currency contract where you ‘buy now, pay later’. You agree to ‘fix’ the rate as it is when you make your offer.”

You can lose out, as the currency may have swung in your favour, but you’re saved the worry of having to come up with extra cash at the end if it hasn’t.

Wright says: “It’s really useful if you are buying ‘off-plan’ where you have many staged payments to send to a developer over the course of a year or 18 months: Fixing your costs at the outset means you don’t go over budget.”

Once you have your mortgage, you can also fix an exchange rate for up to two years’ worth of payments, if you want to know exactly how much you will be paying each month.

When you are using a currency service, take the time to check the company’s fees and commission rates.“ A reputable company will waive charges for transactions above a certain value, so don’t let the property or estate agents talk you into signing without getting a proper quote on your currency,” advises Robin Haynes, director at Foreign Currency Direct.

Weighing up the costs

If you’re buying outside the euro-zone, you may initially be put off by the higher interest rates in Bulgaria, for example. “ However, it’s cheaper in many other ways,” according to David Smith, sales director at broker Bulgarian Dreams: “The average one-bed apartment is about £40,000. You would pay double that in France, and in some parts of Spain you would pay two-thirds more. It’s also cheap to live in Bulgaria and the taxes are lower.”

The completion taxes on a Bulgarian property are about 3 per cent, says Smith, whereas they can be 10–11 per cent in France, for example, and capital gains tax – the tax you pay on the profit you make when you sell a property that’s not your main residence–is only 15 per cent.

It follows that the rental value of the property will also be lower than a place in France, Spain or Italy. It’s seen as ‘up and coming’ so it’s still generally investors who are buying out there, while the infrastructure of some resorts is still being built.

But importantly, never allow yourself to be pressurised to complete on a property while you’re out on holiday, or to sign anything you are unsure about.

Conn says: “Make sure you understand the contract that you’re signing. If you need a translation, get an independent translator to do it for you. Buying a home abroad can be great but there is a lot to consider.”

CASE STUDY:

Kate Baker, 37, and her boyfriend Richard Moore, 41, have bought a two-bed apartment in Valencia, Spain.“ Barcelona was too pricey,” says Kate, a marketing manager: “But we wanted to buy in a Spanish city. Then we heard that the Americas Cup is coming to Valencia in 2007. There was a lot of development as a consequence and low-cost airlines flew there, so we felt it was on the up.”

Kate and Richard invested in property abroad, hoping it will form part of their pension pot, because they feel property is safer than the stock market.“ But we also want to enjoy holidays out there,” says Kate: “We bought the apartment in July (2005) and go there once a month. We work near Gatwick, so can leave the office on Friday afternoons, hop on a plane, and be sitting in a paella bar in Valencia that evening.”

The couple opted for a Spanish mortgage, arranged through a broker in the UK, who liaised with the bank on their behalf. The interest rate is 3.75 per cent.

“ We could have had 3.5 per cent if we’d had a bigger deposit but we were only able to put down 20 per cent, not 30 per cent. To raise the money we remortgaged our home in Brighton, and used our savings to cover the extra 15 per cent needed in fees.”

Kate and Richard paid €240,000 for their property and hope to rent it out for € 500 a week.

“ Property prices went up between our putting the offer on the property and completing on it, which meant that we had already made #15,000 on it,” says Kate.