Live the dream... avoid the nightmare
From mortgages and tax to the legal pitfalls, our guide to buying a European bolthole
OWNING a property in sunnier climes is a dream realised by thousands of Brits each year – and with keen prices and a strong pound there are bargains to be had. But hurry, because these will not be around forever as economic recovery spreads across Europe.
ARURAL idyll in a remote corner of Europe is perfect for a relaxing summer holi- day. But a two-week break in a rented property is very different from owning a holiday home full-time, through all the seasons. Dangers lurk around every corner – language difficulties as well as legal and cultural challenges, although hopefully not with the same dramatic results as those portrayed in this summer’s ‘Brits abroad’ movie, Gemma Bovery.
The film, starring Gemma Arterton, is a modern reworking of the classic French novel Madame Bovary by Gustave Flaubert. A Brit- ish couple, Gemma and Charlie, move to the Normandy countryside – but with costly results as Gemma embarks upon a torrid affair with the son of a local aristocrat.
Clare Nessling, director of specialist broker Conti Mortgages Overseas, based in Hove, East Sussex, says: ‘Buying a property abroad is an exciting prospect but one important rule must always apply: don’t let your heart rule your head.
‘The principles you would stick to when buying property in Britain equally apply when purchasing overseas. Do your research, get advice and don’t cut corners.’
STERLING BENEFIT
ALTHOUGH overseas property values across Europe are rising again after sharp falls in the aftermath of the 2008 financial crisis, prices remain attractive in many popular destinations. Mortgage rates are also low – as they are in the UK.
The big advantage of buying now is that the pound remains strong against the euro. According to currency specialist Smart Money Exchange, a €200,000 property in a eurozone country would cost a buyer £146,000. This time last year it would have been £160,000 and at the beginning of last year, £168,000.
MORTGAGE COSTS
THE easiest way to fund an overseas property purchase is with savings or by remortgaging the family home in the UK.
But those requiring a mortgage for a eurozone property will normally have to borrow in euros. This can be an advantage for those who then go on to rent out the property. Any euro income generated can then be used to meet the monthly euro loan repayments, without being affected by exchange rate movements.
Mortgage borrowers will need to scrape together a significant deposit. Simon Conn, of Conti Mortgages Overseas, says: ‘The most you will be able to borrow in France is between 80 and 85 per cent of the property’s value. As here, the bigger the deposit, the cheaper the mortgage rate. Of all the European countries, France has the most competitive mortgage market.’
Non-residents tend to be offered a variable mortgage rate of between 2 and 3.5 per cent with the best rates available for those able to put down 40 per cent deposits.
In Spain the maximum loan is 70 per cent of a property’s value. Variable mortgage rates are between 2 and 3 per cent. Portugal’s maximum home loan is between 70 and 80 per cent with mortgage rates available at between 2.5 and 3.5 per cent. In Italy the maximum loan is 60 per cent and mortgage interest rates are between 3 and 4 per cent.
Fixed-rate loans are available in France from 1.95 per cent, Spain, 3.6 per cent, Portugal 4.2 per cent and Italy 5 per cent.
EXTRA CHARGES
TOO often buyers overlook the extra legal and tax charges they must pay when buying an overseas property. Conn says: ‘These costs can add between 10 and 15 per cent to the final purchase bill. Some of these charges have gone up considerably as hard-pressed European governments have had to look to generate extra income in the wake of economic crises that have lingered since 2008.’
LEGAL ESSENTIALS
IN THE excitement of finding a perfect overseas property, buyers often forget to take basic precautions such as scrutinising all legal documents.
Nessling says: ‘Never sign a contract that you don’t understand. If English and foreign language versions are provided, ask your solicitor to confirm the English one is a true translation to ensure there are no omissions such as extra fees.’
She says it is vital to check how much deposit is required and whether it is refundable if a deal turns sour. Also, if a new-build property is being bought, it is key to
check when any stage payments must be made.
To be certain the property price tag is fair, arrange an independent valuation. Nessling says: ‘An independent valuation will highlight potential problems such as damp and boundary disputes.’
Finding an English-speaking solicitor who is independent of all parties involved in the home purchase makes great sense. The British Embassy or consulate will provide a list of English-speaking lawyers.
Nessling adds: ‘Make sure the solicitor confirms that all required permissions, licences and planning consents have been obtained and that you will be registered as the official owner.’
Some buyers in Spain, for example, have been caught out buying properties that carry debts.
Purchasers of rural properties have also found to their horror that they bought into a poor deal when it emerged later that they lacked the correct planning consents for the home.
An advantage of taking out an overseas mortgage is that the lender will also carry out its own legal checks and valuation.
TAX MATTERS
IT IS vital to seek tax advice in advance to avoid unexpected bills. An advantage of having a mortgage in France and Spain, for example, means it may reduce the property’s value for local tax purposes.
Sharon Omer-Kaye, tax partner at Baker Tilly, a specialist adviser on overseas property, says: ‘Since inheritance laws vary from country to country, it may be necessary to draw up an additional will in the destination country to make sure it goes to your loved ones on death.’
The other important issue is income tax – and if the property is rented out there will be tax to pay in the country where you own it. Capital gains tax will also apply on any gains when the property is sold. There are double taxation agreements between the UK and most European countries which should mean homeowners do not pay tax twice – but the higher rate will usually apply. She adds: ‘Be wary of purchasing a property partly in cash. Sometimes this part of the payment isn’t shown in official documents, which will affect the capital gains tax calculation.’
RETIREMENT FUNDS
NEW pension freedoms since April, allowing the over-55s greater access to their pension savings, have also given Brits more buying power and contributed to a flurry of overseas property purchases.
Darren Kilner, of currency trader FAIRFX, says: ‘We’ve seen a spike in money transfers for property purchases since the new pension rules came into effect.’
Leaving a money transfer to the last minute by going to your own bank should be avoided because of uncompetitive exchange rates and hidden charges. Kilner says: ‘When transferring through HSBC and Lloyds you could lose £1,740 on the foreign exchange fee for a £100,000 transaction compared with a specialist service.’ Other reputable foreign exchange firms include HiFX, Caxton FX and MoneyCorp.