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Properties in Portugal in demand: How to finance a holiday home overseas

With travel starting to tentatively open up, holiday rentals in green list countries are in high demand.

But for those wanting to make a more long-term investment and commitment, buying an overseas holiday home could also seem like a tempting option. 

One of the winners of Covid-era tourism is set to be Portugal, the most popular European travel destination that has been placed on the green list – and interest from British buyers has risen strongly with searches almost doubling.

A beach in Portugal’s Algarve region, which has begun welcoming back UK tourists

According to Rightmove, enquiries about properties in Portugal surged 93 per cent when it was first speculated that the country would be on the green list.

‘We expect the spark of pent-up demand we saw when the British Government announced the green list to ignite into a surge of interest from UK buyers in the coming weeks and months,’ says Chris Garveigh, managing director at Chestertons Portugal.

‘The Covid-effect means that the appeal of living in Portugal to non-residents is more pronounced than ever before, including the low cost of living, excellent healthcare system, beautiful beaches and laidback lifestyle.’

Other countries on the green list include Australia, Brunei, Gibraltar, Iceland, Israel, New Zealand and Singapore. 

With holiday homes in popular resorts often more expensive than the average property in the UK, many will be looking to finance them with a mortgage.

But how easy is it to get a mortgage on property overseas, and how do you go about it?

To remortgage here or borrow abroad?

When buying a home abroad, there are normally two borrowing options. 

The first is to borrow money secured on assets in the UK and use it to buy your holiday home.

For most people, this means remortgaging their main residence in the UK and using the equity to buy their holiday home outright.

How much does a holiday home cost? 

Rightmove looked at property prices in three most popular Portuguese resorts: 

1. Albufeira

Asking price for a family-sized villa: €463,000 (£399,000)

2. Carvoeiro

Asking price for a family-sized villa: €677,000 (£584,000)

3. Vale do Lobo

Asking price for a family-sized villa: €1.5million (£1.23million)

In France, Matthieu Cany of French estate agency network Sextant Properties says overseas buyers spend an average of €465,000 (£401,000) – but that a two-bed holiday home can be snapped up for as little as €230,000 (£198,000).

This is the easier option, as it means you don’t have to find an overseas lender and negotiate the mortgage approval process – which may be stricter for foreign nationals.

‘The UK mortgage market is far more flexible than in most other countries, so it may be easier and quicker to borrow in the UK,’ says Miranda John, director of international mortgages at broker SPF Private Clients.

‘Post-Covid and post-Brexit, the assessment of self-employed borrowers’ income is particularly stringent overseas.’ 

You could also take out a mortgage on your holiday home that is secured on your main residence. 

However, it is worth bearing in mind the risks of staking your main home on a holiday property.

‘In general, our advice would be to not remortgage your main home in Britain to pay for a holiday home, as it is desirable to keep the two transactions separate,’ says Garveigh.

‘For example, if you came into financial difficulties down the line, keeping the two assets separate in mortgage terms gives you greater freedom to sell the holiday home rather than your main residence to pay down any debts.’

The second option is to take out a mortgage on your new property overseas with a local lender.

This three-bed villa in Carvoeiro in Portugal's Algarve comes with its own swimming pool, and is listed on Rightmove with an asking price of €635,000 (£547,000)

This three-bed villa in Carvoeiro in Portugal’s Algarve comes with its own swimming pool, and is listed on Rightmove with an asking price of €635,000 (£547,000)

Some UK lenders used to have branches in popular holiday home destinations such as France and Spain to do business with expats and holiday home owners, but these have mostly been closed.

However, if you are looking to buy in a popular destination such as France, Spain or Portugal, there are plenty of brokers and agents – both in the UK and abroad – who are set up for this purpose and will help organise your mortgage for you in exchange for a fee or commission.

If you are new to the local market, don’t speak the language or haven’t bought a property abroad before, this may be worth it to guide you through the process. 

Because overseas banks do not have access to your UK credit file, be aware that the process can take longer. 

The upside is that there may be tax benefits to borrowing abroad rather than in the UK. 

This modern one-bed apartment in Albufeira in the Algarve is listed on Rightmove with an asking price of €157,000 (£135,000)

This modern one-bed apartment in Albufeira in the Algarve is listed on Rightmove with an asking price of €157,000 (£135,000)

For example, France has a wealth tax charged on real estate assets – but the mortgage is deducted from the value of the property for tax calculation purposes.

Depending on where you are buying, the decision may be made for you, as lenders in some smaller countries with less established holiday property markets do not offer mortgages to non-residents.

‘As a general rule, the more developed and long-standing the market is, the better the local finance options are,’ says John.

‘For property in more unusual destinations, you would either need to be a cash buyer or consider a mortgage secured on property assets in the UK.’

What are the interest rates in Europe?

The good news for those considering buying a European property with a mortgage is that the interest rates can be lower than we are used to in the UK.

In Portugal, mortgages are currently available with interest rates as low as 0.5 per cent, according to broker Ideal Homes Mortgages. 

This compares favourably to even the best mortgage deals in the UK, which do not stray much lower than 1 per cent.

In the popular Western Algarve, buyers can snap up this four-bed villa, also listed on Rightmove, for €1.5million (£1.3million)

In the popular Western Algarve, buyers can snap up this four-bed villa, also listed on Rightmove, for €1.5million (£1.3million)

‘Our buyers have a wide range of reasons for wanting to own property in Portugal, demonstrating the breadth of the country’s appeal,’ says Chris White, chairman and founder of Ideal Homes International.

‘Whether they’re buying a main residence, second home or investment property, Portugal has some excellent mortgage deals available.

‘Mortgages have gone crazy at the minute in Portugal because of the low interest rates. 

‘Many clients have the money to buy, but they would rather borrow from the bank and use their funds either for a second purchase, or something else entirely.’

The typical Portuguese holiday home loan 

Variable rate rather than fixed

€300,000 – 350,000 valuation

Age of borrower: 55-60

Interest rate – 0.8 per cent

Term – 15-20 years

€1,000 per month repayment

4-6 weeks processing time to secure the mortgage

Source: Ideal Homes Portugal

In France, mortgage rates for overseas nationals broadly reflect the UK’s. 

But for those used to borrowing in the UK, the European mortgage market may seem a little less flexible.

‘The typical mortgage rate for non-residents is 2.25 per cent for a 20-year fixed-rate mortgage with a 15 per cent deposit,’ says Matthieu Cany of French estate agency network Sextant Properties. 

‘For an interest-only mortgage, it is possible to find a 7-year fixed rate for 2.35 per cent with a 25 per cent deposit.’

In the UK we are used to fixed rates of two or five years, for example, but much longer fixes of up to 20 years are widely used on the continent.

This means it is wise to time your purchase carefully in order to secure the best possible rate.

Generally you will need a bigger deposit, with minimum deposits of up to 20 per cent common in Portugal and 30 per cent in Spain for example – although there may be exceptions.

‘For buyers who find the 20 per cent deposit a stumbling block, bank repossessions offer the potential for 90 per cent mortgages, though at a slightly higher 1 per cent interest rate,’ says White.

Beware the costs of a home abroad 

Tax: Work out what the tax rules are in the country where you are buying. This might involve an annual bill, or a levy when you sell. 

You will also need to declare your income to HMRC if you rent the property out, and pay capital gains tax in the UK when you sell. 

Insurance: The cost of insurance on your holiday home will be more than on your home in the UK. 

If you are renting it out you will need a specialist holiday let product, and if you aren’t, insurers will charge more as it will be empty for long periods. 

Be aware of clauses that might invalidate your policy, too. Some insurers insist that the water system is turned off when the home is unoccupied, or the heating left on during winter, for example. 

Maintenance: If you are renting out your holiday home, you will need to organise handing over keys and dealing with maintenance issues. 

If it will be unoccupied for long periods, will there be someone local who can check in on it and be on hand in case of an emergency? 

Things like keeping the grass cut in the garden can also reduce the risk of burglars. 

Extra costs: If you are buying on a holiday park or managed estate, you might need to pay a ground rent or service charge. 

 

Has Brexit had an impact?

Lenders in some – but not all – European countries have tightened their lending criteria to Britons since Brexit, so it is worth finding out the situation in your local market before you start seeking out a mortgage.

‘In France, banks are taking an extremely risk-averse approach to any new lending to Brits post Brexit while in other countries there is no lending available to non-residents,’ says John.

Those seeking a place in the sun in Portugal could find that attitudes are more relaxed.

‘The good news for Britons seeking a holiday home in Portugal is that Brexit alone has had very little effect on the non-resident mortgage market,’ says Garveigh.

‘Institutions continue to lend to Britons, just as they have been offering loans to many non-EU nationalities, such as the Americans, Swiss and others for some time.’

Saint Tropez in the South of France. The typical UK buyer purchasing a holiday home in France spends just over £400,000, according to Sextant Properties' Matthieu Cany

Saint Tropez in the South of France. The typical UK buyer purchasing a holiday home in France spends just over £400,000, according to Sextant Properties’ Matthieu Cany

Watch out for the exchange rate 

When you buy a home abroad, the value of your investment is tied to the exchange rate – but the level of risk depends on whether you have borrowed money in the UK or overseas. 

‘If you take a local euro loan, you will match the asset and liability so the mortgage could not ever exceed the property purchase price,’ explains John.

‘However, the cost of servicing the mortgage will fluctuate. If you have an euro loan and the pound were to weaken, the amount you pay per month will increase as will the balance of the mortgage when converted to pounds.

‘If you take a loan in sterling and the euro weakens, should you have to sell the property any potential gain could be wiped out if you repatriate the funds to the UK or in a worst-case scenario there may be insufficient funds to repay the outstanding mortgage.’

The exchange rate can also fluctuate during the time between viewing and completing on your property.

‘It’s very important for buyers to consider the exchange rate. Under normal circumstance, the buying process takes 3 months, during which time currencies can vary by 20 per cent,’ says Cany. 

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