Autumn is the peak season for buying a second home abroad, as people return
from their summer holidays and seek to make the dream of owning that idyll
in the sun a reality.
About 300,000 British households now own a foreign property and the number has
trebled over the past decade, according to Grant Thornton. The accountancy
firm estimates that between 1.5m and 2m British households will own a second
home abroad by 2025.
Yet many people risk paying more than they need. Careful financial planning
can cut about £40,000 off the cost of buying and owning a second home worth
€200,000 (£137,000). We offer some tips.
1 Don’t use your bank to transfer money
One of the biggest expenses when buying abroad is transferring your deposit
from your British bank to a local account and then to the local solicitor.
You could lose thousands if you don’t get a good exchange rate.
Specialist foreign-exchange brokers such as Currencies Direct, Foreign
Currency Direct (FCD), HIFX and Moneycorp, generally offer better deals than
high street banks.
A survey carried out by GSA Business Development, an independent marketing
consul-tancy, found that someone looking to put down a deposit of €200,000
last Thursday would have got a rate of 1.3932 euros to the pound from
NatWest, so they would have had to stump up £143,554. FCD, however, had a
rate of 1.4538, costing £137,570 – a saving of nearly £6,000.
2 Fix your exchange rate before you complete
Exchange rates can change dramatically in the time it takes to purchase a
property, and if the pound weakens during that period, the sterling cost of
your home will increase.
If you had agreed to buy a property for €200,000 on January 23, when the
exchange rate was €1.5299 to the pound, it would have cost you £130,727.
However, if you didn’t complete until March 14, when sterling had weakened
to €1.4557 to the pound, you would have had to pay an extra £6,663.
If the pound strengthens during the time it takes to complete on the purchase,
you will of course pay less, but many people are not prepared to take the
risk.
Mark Bodega at HIFX said: “Fluctuating currency rates can make a huge
difference to the final price you pay for your overseas property. We always
remind clients that they would never agree to buying a property in the UK
without knowing the final cost.”
Most forex brokers let you fix the exchange rate, often for up to two years.
3 Consider a euro mortgage
Advisers generally recommend that you have the mortgage for your holiday home
in the local currency so the debt does not move out of line with the value
of the property.
You may also benefit from a lower interest rate.
The European Central Bank’s interest rate is currently 4%, compared with 5.75%
in Britain. In France, you can fix at 4.9% for 20 years, whereas in Britain
the best 20-year fix from Nottingham building society is 5.99%.
If you remortgaged your main home to release equity to buy a property in
France outright at the Nottingham rate, you would pay an extra £20,096 over
the 20-year term.
However, in some cases, releasing money from a UK property is the best option
– it depends on where you want to buy.
Miranda John at Savills Private Finance International, a broker, said: “In
some countries foreign nationals cannot borrow locally.
“It may also be an expensive option because interest rates are much higher
than in Britain. In Cape Verde, for example, rates are about 8%.”
Therefore, if you have equity tied up in your home in Britain, you would be
better off remortgaging to release money to buy the property outright.
You can get a 20-year fix at 8% in Cape Verde. A mortgage for £136,000 would
cost you £273,600 over the fixed term. However, if you remortgaged your UK
home it would cost only £232,228 over 20 years, saving you £41,372 in
interest. This assumes that you have a 20-year fix with Nottingham building
society.
4 Take on debt to reduce local taxes
If you own a property overseas you have to pay local as well as British taxes.
In France, for example, a wealth tax is levied on French assets worth €760,000
or more owned by a nonresident.
The rates range from 0.55% to 1.8%. Someone with a property worth €1m would
pay €1,375 a year, while the cost for someone with a €2m property would be
€8,475 a year.
Even if you can afford to buy a property outright, it may be worth taking on a
mortgage to keep the value below €760,000. John said: “Simply by having a
French loan secured on the property you can avoid paying this annual tax.”
5 You don’t have to put down a deposit
You are normally required to put down a deposit of at least 10%, but if you do
not have the money now it may still be possible to secure a property and
benefit from current prices – even if you do not intend to complete on the
deal for another one or two years.
Many people who buy abroad purchase a property before it is built – known as
buying off-plan – in the hope that they can get in at a lower price.
You normally have to put down a deposit to secure the deal, but some
developers will accept an overseas exchange bond instead.
These are in effect insurance policies which guarantee that the developer will
get the full deposit on completion. They are only available on new-build
properties.
Lucas Zachara at Exchange Insurance Company, which offers exchange bonds,
said: “Many of those wanting to buy abroad hold back because they are
reluctant to part with large sums of money to developers overseas,
especially on properties that may be months or years off completion. That is
where we come in.”
Even if you have the money to put down for a deposit, it may be worth buying a
bond instead, and leaving that cash earning interest until it is needed.
Some developers will refund the cost of the bond as part of the sales
incentive.
Developments where you can currently use a bond include Oceanico and Vale
D’Ouro in Portugal, Selva Piana in Tuscany, Palatinum in Murcia, Spain, and
the Eden Residence in Budapest.
Suppose someone wanted to purchase an apartment in Spain worth €200,000 that
was not due to be ready until 2009. They would normally have to put down a
10% deposit to secure it, but they could buy a two-year overseas exchange
bond for €2,240 instead and pay the total purchase price on completion.
The buyer could therefore keep the £13,700 they would otherwise have had to
put down as a deposit in a savings account. Halifax is paying 6.75% on its
two-year Websaver fixed-rate bond.
Over the term, you would earn £1,849.50 in interest (£1,109.70 after 40% tax
is deducted).
USE THE EXPERTS FOR CASH TRANSFERS
JANE and Barry Krite, a company director, from Radlett in Hertfordshire,
bought a second home in Majorca last year.
When they transfer money to their Spanish bank they use Foreign Currency
Direct, a specialist broker, rather than a bank.
Jane, a 50-year-old housewife, said: ‘We saved about £30,000 when we bought
the villa because the exchange rate offered by Foreign Currency Direct was
so much better than our bank. We used them again this year when we bought a
boat in Majorca and saved about 3% on the cost of the currency transfer.’
