Buying property abroad is never easy. Choosing well is always more difficult when you’re unfamiliar with the lie of the land. First there’s the language barrier. Then there are legal differences. There are tax differences. There are planning differences. And to crown it all there’s the mortgage. At least you hope there is! The problem with cross-border mortgages is that there’s no such thing as consistency. Even across the 25 supposedly-integrated countries of the EU, the home loan market is a by-word for misunderstanding and confusion. So if it leaves you at a loss – you’re certainly not alone.
And that, of course, is why cross-border mortgages account for just a tiny percentage of all the home loans we take out every year.
Just look at the figures. According to statistics released in November by the European Mortgage Federation (EMF), mortgages across the EU at the end of 2005 were worth €5.1 trillion – an increase of 11 percent since the end of 2004, a figure well above the average annual growth rate of 9.4 percent recorded over the past decade. And what percentage of this enormous market were cross-border mortgages? Somewhere between one and two percent, that’s all.
For years, the European Commission has been talking about integration of the EU mortgage market, which it says would enhance consumer confidence in mortgage products and raise EU GDP by 0.7 percent as a direct result. But even the might of Brussels has been stymied, as Internal Market Commissioner, Charlie McCreevy, puts it, “by the numerous national mandatory rules which limit consumers’ choice, mobility and ability to freely contract.” That will only change if ever the Commission threatens to legislate.
So what exactly do we mean by cross-border mortgages? Do we mean that in a new Europe without frontiers, a Spaniard can fly to London with his paperwork and take out a mortgage with a UK bank to buy a home in Spain? There’s probably no practical reason why that shouldn’t happen – apart from the fact that banks don’t want to open themselves to that level of cross-border competition – but it doesn’t.
What does happen regularly is that Britons or Germans or Dutch purchasers go knocking on the doors of Spanish banks looking for mortgages for properties in Spain – and in the majority of cases they probably manage to get them. It’s an easier proposition if that British purchaser is also resident in Spain. But even non-residents can be successful, especially if they take advice from an independent mortgage expert in advance.
And although it was pretty much unheard of until recently, it is now possible for a foreign EU national, resident in France, for example, to take out a mortgage with a French bank to buy a property in Germany. So the market is undoubtedly changing and responding to customer demand. “The main problem we find is that people don’t do enough research before they come to Spain to buy”, says Brian Thornley of Mortgage Services Mallorca, a brokerage which deals with British, German and Spanish buyers.
“They don’t always understand the differences in the buying process”, he told abc Property Magazine. “They think they can get a mortgage in exactly the same way as they can in their own country. And while it’s true that there are more and more UK lenders, for instance, appearing here in Spain, the lending criteria are somewhat different.” He’s seen it over and over again – people buying with their hearts, not with their heads. “They’re here on holiday, they love the sun and the lifestyle and before you know it they’ve paid a ten percent deposit on a property and signed a pre-contract agreement.”
Of course talking to your bank when you get back home is far too late. And if you can’t produce the cash to go ahead with the purchase, you lose your deposit. It happens far more often than you’d imagine.
However, it’s worth remembering that it is particularly beneficial for UK buyers to take out mortgages with European banks. That’s because British mortgages are benchmarked to the sterling base rate, while European mortgages are tied to the Euribor (European Inter-Bank Offered Rate), which is typically about one percent lower. That can mean total savings of anywhere from 1 to 1.5 percent. On the other hand, the vast majority of mortgages in Spain are variable rate rather than fixed rate mortgages, says Matthias Jahnel of Overseas Mortgage Shop Mallorca. “German clients, for example, are more used to taking out fixed rate mortgages, which is what they do at home. But here in Spain only two or three percent of mortgages are fixed rate.
“So whereas British purchasers find Spanish mortgages cheap – German borrowers are often surprised to find them more expensive.” It’s also worth noting that none of the Spanish banks is currently offering mortgages for buy-to-let properties. Starting this year, the first bank in the whole of Spain to offer such a product is the UK-based, Leeds Building Society. So for a British buyer with a particular type of investment purchase in mind, this might be an important factor.
Once your mortgage is in place, the only problem is a logistical one – paying it. And that’s where UK company, Currencies Direct, comes in. Its Head of Trading, Mark O’Sullivan, explains: “A client who opens a sterling account with us here in the UK may want to make mortgage repayments in, say, euros or dollars. We take the money by direct debit from their bank account and transfer it to their foreign bank. And we don’t charge our clients. We make our money on the exchange transaction.
“One of the things that bothers clients who take out mortgages in a different currency is that the monthly repayments are different all the time as the exchange rates fluctuate. We’re currently running a promotion where British clients can fix the rate of exchange at €1.45 to £1 for a full year – so they’ll know exactly how much their mortgage repayments are going to cost them every month.”In the end the answer is simple: you should take out your mortgage wherever fits best with your own personal circumstances and finances.
And the more research you do, the clearer that will become. In the end the answer is simple: you should take out your mortgage wherever fits best with your own personal circumstances and finances.
But while you chew over the pros and cons, here are 10 points worth keeping in mind:
- Typically it’s usually more practical to take out a mortgage in the country in which you live – simply because you’re a known quantity to your bank
- However, because the property you’re buying is in another country, it will usually not be enough security to offer to lodge the deeds to the new property with the mortgage lender
- They may, perhaps, want you to give them the deeds to your primary residency as a surety – so this is something you’ll need to consider in advance
- Or they may suggest you open a special savings account, lodge a specified amount of money which varies depending on the value of your purchase, and leave that account untouched for an agreed period of years
- Borrowing in the country in which you live also means that your mortgage transactions remain in the same currency – irrespective of whether or not it’s the euro – which makes for easier management
- And if you do live in the euro zone, having a euro mortgage means interest rates are predictable along ECB lines
- Also, you’re not introducing the uncertainty of currency exchange – such as you’d have, for instance, if you managed to take out a Turkish mortgage in Turkey, and had to set up a regular transfer of cash from a euro account
- Even good, solid Slovenia and Hungary now look unlikely to meet their target dates for the introduction of the euro – and there’s always that element of uncertainty in emerging markets, which you can hedge by keeping your mortgage at home
- On the other hand, if you live in the UK but take out a European mortgage, you should benefit from the lower Euribor rate
- And don’t forget, fixed rate mortgages – the norm in countries such as Germany – are a rarity in others, like Spain.