Published: 18:28 EST, 22 March 2014 | Updated: 05:14 EST, 24 March 2014>
Our guide will help you find a place in the sun – without getting burnt.
Having endured months of miserable rain, it is little wonder many buyers are looking to sunnier climes to invest in a second property.
Before the credit crunch hit in 2008, the Continent was a popular choice for a holiday home, luring investors with attractive rental yields and promises of substantial capital growth.
Now, as the exchange rate edges back in favour of sterling, buyers are back, purchasing properties in France, Spain, Italy and Portugal.
Hot: A Place In The Sun seminar with Amanda Lamb drew 5,000 visitors
Miranda John, international manager at mortgage broker SPF Private Clients, says: ‘The price of foreign property can seem attractive when exchange rates favour sterling as they are doing now.’
Unpredictable British summers and high property prices in popular holiday locations such as the Cotswolds and the Lake District are another motivation for buyers looking overseas.
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John says: ‘People are searching for investment opportunities, especially in Spain, where prices have taken a battering and banks are offering some attractive deals on repossessed homes.’
Peter Robinson, managing director of the Association of International Property Professionals, agrees that investors are returning to the market.
But he says: ‘They are a lot more cautious this time around. We are seeing a large increase in the number of people attending overseas property exhibitions. It is one thing to go online and surf dream properties on a whim, quite another to drive to a conference and seek out experts and advice.
‘But Channel 4’s A Place In The Sun seminar at the Birmingham National Exhibition Centre with TV presenter Amanda Lamb hit a five-year high last September with more than 5,000 visitors.’
DO YOUR HOMEWORK
Anyone thinking of buying abroad with a partner should start by discussing why they are doing it. Robinson says: ‘If one person is focusing on investment returns while the other is dreaming about interior design, it does not make for a happy purchasing duo.’
Write down your objectives and be clear whether you are buying the property for holiday use, retirement or investment. Are you planning to rent out the property or live there? Do not let your heart rule your head and always buy with an exit strategy.
Robinson says: ‘Once the novelty wears off you might want to sell your property or rent it out and you will only get your hands on the cash if you can find someone else who is interested.
‘No one can predict what the market will be doing when it comes to selling, so you should not enter an investment lightly or if you cannot afford to lose the money you have put into it.’
If you are a cash buyer investing for capital growth, letting your property may not be a priority. But if you are relying on rental income to cover your mortgage costs, letting potential is a vital consideration. You will need to do serious research and establish from the outset whether you want to attract holidaymakers or long-term local lets.
CURRENCY AND COSTS
When it comes to parting with cash for your dream property, make sure you do not lose out because of poor exchange rates. Check specialist money companies such as Moneycorp and HiFX, which usually offer more competitive exchange rates than high street banks.
Be mindful of currency exchange risk, especially if you take out a local currency mortgage. If sterling falls against the currency, the loan repayments will increase. Do not forget to factor in stamp duty, taxes, legal fees and insurance. These can add a further 10 per cent to the purchase cost.
MAKE IT LEGAL
‘Buying property overseas can be a rewarding experience, but there are plenty of pitfalls so don’t rush in,’ warns Graham Bates, chief executive of Leeds-based national residential property group Eddisons Residential.
‘Do your own research and don’t rely entirely on what agents tell you, because their objectives will not necessarily be aligned with your own.
‘Get a reputable English-speaking lawyer to protect your interests and not someone recommended by the selling agent.
‘Consider taking on a UK firm of lawyers as well to ensure that any implications under British law are fully considered, such as the eventual inheritance of the property.’
Ownership can be more complex overseas, so it is important to verify that the person selling the property is actually the owner, and that the agent involved has the legal right to sanction the deal.
Never sign documents you do not understand or are in a foreign language – get your lawyer to translate. Never make payments without checking with your legal adviser.
TIPS FOR FINDING PROPERTY WITH POTENTIAL
- Talk to agents, locals and holidaymakers in your chosen area so you fully understand the market.
- If it is to be a holiday let, it is essential you do your location homework. In parts of the northern Mediterranean, for example, there is a shorter summer, so indoor entertainment space is vital.
- Ensure there are good transport links to main cities and airports.
- Choose a property that stands out from the crowd, with at least one attractive feature such as a sea view or a pool.
- Being close to facilities such as shops, restaurants and the coast will help you to let it more easily.
- If you plan to buy in a large development, find out how many of the properties are owned by investors and how many are private homes – a healthy mix will help to reduce competition if you sell.
- For help tracking down a suitable mortgage, try an international broker.
It is vital to check the tax rules on property purchases before you buy overseas. They can determine how you should go about buying. In some countries, setting up your own company or buying the property in the name of a child could help sidestep hefty tax bills.
Stephen Goldstraw, a partner at legal firm Penningtons Manches, says: ‘Owning a second property can be an attractive proposition, but it comes with plenty of tax challenges.
‘If it is rented out, there will be income tax to pay. If you sell it, there might be capital gains tax. These taxes can also arise in the country you buy. Generally a tax credit is available in the UK for the foreign tax paid, but this usually means you end up paying the higher of the UK or the overseas tax rates.
‘You may also expose yourself to inheritance tax in your chosen country and to its probate requirements if you die while it is in your ownership. Again you would generally get a tax credit to offset against your UK inheritance tax liability.’
THE JOYS... 'I sit on the balcony of my Cote d’Azur flat and watch the stunning sunset'
Sanctuary: Jayne Johnson uses budget airlines to get to her French home
When Jayne Johnson’s mother left her money in her will, suggesting she use it as a deposit on a property on the Cote d’Azur in the south of France, she accepted the challenge.
Ten years on and the one-bedroom flat she bought in Villefranche near Nice for £120,000 has more than doubled in value, and rental income from holidaymakers has helped to pay off her mortgage early.
Jayne, 52, an energy broker from Leeds, says: ‘It’s my sanctuary. I visit the place regularly, using budget airlines to fly into Nice from Leeds or Liverpool.
‘When I sit on the balcony and watch the sunset over the Mediterranean, I raise a glass to my mum. She loved the south of France and had wonderful memories of driving down there on a motorbike with my father. She had great joie de vivre and wanted me to enjoy my life too.’
Buying a property in France was also relatively easy. ‘Even though I am fluent in French, both the agent and lawyer spoke English and were efficient and friendly. It also helped that I travel regularly to Monaco on business, so I knew Villefranche well,’ she says.
When Jayne is not enjoying the apartment herself, she rents it out on the Owners Direct website. She believes its stunning location, proximity to the sea, easy access to skiing in the Alps and the Italian Riviera, as well as Nice Airport, are the reasons it never fails to let.
She says: ‘I would urge people with money to invest in a property in France. Of course, you need to be wary of the currency exchange rate but there are still some bargains to be had out there.’ Those who are not cash buyers will need to make arranging a mortgage a top priority.
Miranda John, international manager at mortgage broker SPF Private Clients, says: ‘Lenders in countries such as Spain and Portugal, where local economies have been savaged by the euro crisis, are reluctant to lend to non-residents, and if they do they will expect large deposits.
‘However, if your heart is set on Spain but you don’t have a big enough deposit, it is worth asking a local bank branch for a list of repossessed properties.
‘But while banks offer more attractive deals on repossessions, I would urge caution unless you know the area well. You don’t want to find yourself surrounded by half-built properties in a state of disrepair, otherwise when it comes to sell, no one will want to buy your property.’
THE PERILS... 'Our Cyprus nightmare is going to the courts'
Threat: Neil Mellis faces losing his home in Britain if he fails with legal action in Cyprus over his villa
With a holiday home in Florida earning excellent rental income, Neil Mellis and three friends joined forces to buy an off-plan villa on a luxurious Cyprus development.
But seven years on, their holiday home in Paphos languishes in disrepair and they have been forced to sell their Florida property to cover the cost of a legal battle against the Cypriot developer – which if they lose could threaten their family homes in Scotland.
‘Alarm bells should have started to ring when the developer paid for us to fly over to view the Alpha Panareti resort in Paphos and put us up in a five-star hotel,’ says Neil, 52, from Aberdeen.
‘We are not gullible people but in 2006 house prices were soaring and cheap finance was everywhere. We were making excellent returns on our Florida investment so extending our portfolio seemed a natural step.
‘We were introduced to Alpha Bank and a local lawyer and felt reassured by the fact they shared the same name as the developer.
‘The bank advised us to take out a mortgage in Swiss francs because it was a stable currency and we were assured holiday rent would easily cover our mortgage costs so we put down a deposit.’
Disquiet set in when the friends discovered they had committed to repay the mortgage from the moment building work began on their £180,000 property.
Neil says: ‘It was frustrating because we were relying on rental income to cover the cost of the mortgage but we had no property to let. Then to make matters worse the development was delayed by eight months. When we finally took possession, we discovered it had been built to a poor standard.
Trouble: Neil Mellis' villa in Cyprus
‘The air conditioning unit leaked, causing a major damp problem, leaving the property uninhabitable and unlettable. The developer offered to make good the damage but expected us to foot the bill.’ Then the Cyprus property market crashed in 2008 and the plunging euro against the strength of the Swiss franc sent their mortgage repayments through the roof.
Neil says: ‘It was a nightmare. Our property was in a state of disrepair so we could not rent it out and our mortgage repayments doubled overnight.’
Neil and his friends have joined with other disgruntled Panareti resort investors to seek redress though the Cypriot courts. Neil says: ‘If we lose, the courts will demand we make good all the mortgage repayments we have missed, plus interest accrued at a colossal sum, creating a real possibility that we will lose our homes in the UK too.’
Source : http://www.thisismoney.co.uk/money/mortgageshome/article-2586828/How-buy-second-home-abroad.html