27 May 2024

Buying in Europe: securing a local mortgage

By Miranda John, Director of international property finance at SPF Private Clients

High Street banks in the UK cannot secure a mortgage on property overseas so the only options are via European lenders.   Although it would seem logical that all the countries in the euro zone would offer similar interest rates and products this is not the case.  Lenders who offer variable interest rates track the Euro Interbank Offered Rate or Euribor rather than the rate set by the European Central Bank but the Spanish prefer the 12 month known as 12M Euribor, the Portuguese either the 6M or 12M and those in Luxembourg usually the 3M Euribor.  French banks have always preferred to offer long term fixed rates for the whole mortgage which has the benefit of insulating borrowers from rate increases.   However, last year the interest rate cycle was at its peak and being tied into a rate for the term of the mortgage, with early repayment charges to boot was not an attractive model.    Furthermore post-Brexit many French banks stopped lending to British residents as the UK was no longer part of the EU so there are now far fewer banks to consider.   

French high-street banks can be generous with loan-to-values (LTVs) for non-residents, with 70 to 80 per cent achievable.  Spanish high-street banks tend to offer a maximum LTV of 70 per cent, and for those buyers who will use the property as a principal residence, 80 per cent may be achievable. There are short and long-term fixed rates as well as variable trackers and competition between banks keeps pricing attractive.   The most competitive terms in Portugal are usually for a maximum loan to value of 65 per cent but up to 80 per cent can be an option.  A point to note is that all the European banks are far more comfortable lending to employed clients with at least a 3 year track record.

Mortgages across Europe are on a repayment basis with capital and interest paid monthly.  Interest only is exceptionally rare and normally only available for higher value purchases when private banks can lend.  In most countries the mortgage must be repaid by the age of 75 years old.   The mortgage market in the UK is incredibly flexible and property is an asset that can virtually always be used to secure finance. This is not the case elsewhere in the world and buyers should be aware that taking a mortgage when buying the property may be the only chance to do so. Capital raising, in Europe i.e. looking to release funds a few years after purchase, is exceptionally difficult to find.  Remortgaging may not be available and where it is there are legal costs and possibly early repayment charges too.

High-net-worth individuals often find they do not fit the rigid mould of European retail banks’ criteria so are more naturally private banking clients, but lending always requires a wider relationship with such banks so only taking out a mortgage is not an option. Generally, the standard requirement is for a minimum of 1 million euros to be invested to qualify for a loan.   For loans of over 3 million euros many owners opt for a mortgage from a private bank. These lenders have the expertise to understand more complex income and have far greater flexibility on age. They also accept a wider range of ownership structures and assets rather than simply income will be taken into account when assessing affordability.  Generally, the maximum loan to value would be lower at 50 per cent and a borrower may be required to set up a special purpose vehicle which will incur some additional set-up costs. The mortgage would usually be on an interest-only basis on a five-year renewable facility, either fixed or variable, with the loan repayable at maturity. 

It is always worth considering a local mortgage as rates compare favourably with the UK and in addition there may be potential tax benefits.  A local mortgage can offset Wealth Tax which is an annual tax payable in France and Spain as if the net value of the property falls below the threshold there is no tax liability.    Ideally speak to a specialist broker well in advance, before you find a property, to ensure you have the complete picture and plenty of time to secure competitive finance in a narrow window.

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