Overseas Mortgage Finance-the challenge for 2012

January 11, 2012

It is emerging that obtaining finance for a mortgage is going to be more difficult to obtain in the future in the UK. Individuals with interest-only mortgages, who subsequently re-mortgage, may need to prove they have the where-with-all to repay the loan at the end of the term.

Indeed the EU are about to vote on legislation early 2012, that would take effect in 2013, which could change regulation of buy-to-let lending and standardise it more with  conventional residential mortgages.

Lenders would be required to test affordability, using standard residential mortgage criteria: relative size of deposit, existing income, other debts. Oddly, it seems they would be obliged to omit potential rental income. This would have a profound effect on who would and who wouldn’t qualify for a buy-to-let mortgage.

The idea of regulating buy-to-let lending, which isn’t currently in either the FSA or Consumer Credit Act’s remit, isn’t new, but it does seem to be taking us nearer to other European countries’ financial systems.

Turkey

The mortgage market in Turkey is fledgling in nature. Up until about 5 years ago foreign nationals were not able to secure a long term Turkish, mortgage against a Turkish property.  Foreign national mortgages are not overly easy to get, there are few banks that offer them. Mortgages in Turkish Lira tend to have a higher interest rate attached to them, than Euro denominated mortgages and a  deposit of 25-30% may be required. Owing to the low prices of property in Turkey, many buyers are cash buyers.

Poland

Generally banks in Poland can be seen as „cash flow“ lenders rather than „collateral“ lenders. In order to raise the desired financing, a bank has to be comfortable that a client’s disposable income can cover the difference between the mortgage loan repayment and the prospective rental income and/or the monthly mortgage repayment at full.

The concept of buy-to-let mortgages doesn’t exist and even taking out a loan with a view to letting out, potential rental income is not taken into account. Only concrete, provable, tangible income is entered into the affordability equation.

This more cautious approach to lending by Polish banks, and particularly to mortgage lending, has helped to create a stable and buoyant property market.  Mortgage debt represents around 10 % of GDP in Poland, compared to 83% in the UK, while poor debtors only account for 1% of Polish mortgages, as opposed to 15-20% in the USA.  By making fewer and more sensible loans, Poland’s banks have limited their own risk and contributed to a stable property market.

Cyprus

In Cyprus, mortgages were largely unknown prior to the initial property boom between 2000 and 2005, partly due to the fact that  many land transactions tended to stay in the same family for generations without ever being sold. The mortgage market was further stimulated on accession to the European Union with the influx of significant numbers of British and other European property buyers in the late nineties.

Of late Cypriot banks are under scrutiny form the ratings agencies such as Standard & Poors, given their exposure to Greek debt and this means the banks are being more cautious and bolstering their liquidity, which in many instances means lending less.

If you are buying a property abroad, what should you do?

It is a good idea to think this through before buying, set a budget  and make sure you get your finances in place at an early stage.  It often takes longer to secure an overseas mortgage than in the UK and the process differs from country to country. So it is best to make sure the requirements are known up front and even pursue several mortgage applications at the same time, this tends to be easier to do through a broker. Otherwise you may end up with no finance to follow through on the purchase and may put the deposit in jeopardy.

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The focus is mainly greater Europe: Poland property, UK investments, Spain property, Turkey property, Cyprus property

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This more cautious approach to lending by Polish banks, and particularly to mortgage lending, has helped to create a stable and buoyant property market.  Mortgage debt represents less than 10 % of GDP in Poland, compared to 83% in the UK, while poor debtors only account for 1% of Polish mortgages, as opposed to 15-20% in the USA.  By making fewer and more sensible loans, Poland’s banks have limited their own risk and contributed to a stable property market.

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