Make your second home dreams come true
For a nation engaged in a long-standing love affair with property, it should come as no surprise that an estimated 10% of Brits own second homes.
But, while some people view a second home as a pure investment, many existing homeowners simply want another pad located in a place they love.
For some people this means within British shores – usually in a familiar holiday spot they have grown to know and love. But while Devon, Cornwall and national parks like the Cotswolds are all desirable properties, there will have price tags to match.
However, looking a little further afield – and combined with the recent house price falls – some country homes may have become more affordable. It is now possible to buy a cottage on the Norfolk Broads for less than £150,000 for example.
When it comes to homes abroad, well-trodden and familiar destinations are the most popular. According to the latest data from overseas mortgage specialist, Conti Financial Services, neighbouring France is the number one holiday home hot spot, followed by Spain and Turkey.
"In today's economic climate, British buyers are sticking to the more traditional overseas locations," explains Clare Nessling, director at Conti.
Even if your tastes do err on the side of the exotic, you could find that legal problems pour cold water on your dream. For example, Croatia, Northern Cyprus and Egypt are all fraught with 'title issues' which means that the land on which the home you are buying is situated, is already in dispute.
Other locations, such as Montenegro, do not recognise property surveys, so parting with your cash – especially on older property – could prove to be a dangerous gamble. Elsewhere, such as in Malaysia, there are certain requirements for how long you have to be an official resident before you can become a homeowner.
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Getting the mortgage
Unless you intend to buy your holiday home outright, you will need to take out a mortgage against it. For a holiday home in the UK, expect criteria to be tight, says Richard Morea, technical manager at broker London & Country.
"If you are buying a second home for your own personal use, you will need at least a 25% deposit and the lender will want to see full affordability for both properties," he says.
The vast majority of UK banks will not lend on a property abroad. And banks that do lend, such as Lloyds TSB and Halifax, use separate parts of their businesses so you won't be able to just walk into your local high street branch.
Instead, you can use a specialist broker such as Conti or Savills Private Finance that will source a lender for you – as well as liaise with native estate agents and lawyers on your behalf.
You will need to factor in broker commission costs too which could be a percentage of the loan taken or a fixed sum. At Conti, the fee could be up to £995 – though you may be charged £495 or even nothing – depending on how much the lender pays the company.
The upside to buying a home abroad is the less stringent lending criteria. "While lending criteria has become tougher around the world, you will find the UK is still the most restrictive. For example, France still offers 100% deals," says Nessling.
You'll have to demonstrate relatively deep pockets however. Overseas lenders use affordability criteria rather than income multiples (where your salary is multiplied by say, three or four).
Generally they insist that, when all commitments have been deducted from your net monthly income – which includes your UK mortgage, bills, credit cards and even school fees – 35% of what remains should be sufficient to cover your overseas mortgage repayment.
But while this calculation hinges on a fairly hefty income, at least interest rates on overseas mortgages are low. For example, variable rates in France start at just 2.35% if you have a 40% deposit and they are even lower in Portugal at 2.24%.
Interest is generally charged against Euribor (which is set by the European Central Bank) or Libor (the London Inter-Bank Offered Rate) if the property is located outside Europe.
Foreign exchange risk
You can choose whether to take out your mortgage in sterling or in the currency of the country in which you are buying. But Conti recommends that your mortgage should be in the same currency as your income. This will avoid currency fluctuations and ultimately a potential lack of affordability.
Currency fluctuations will also need to be considered when it comes to putting down a lump sum deposit on your overseas home. The money will need to be paid in the local currency which means buying it with sterling on the money markets.
But using your local bank to do this for you and then transferring the funds is likely to be a lot more expensive than using a standalone foreign exchange bureau.
Robin McEwen, managing director of foreign exchange specialist, the Foremost Currency Group, says: "On average our broker's rate will be up to 3% better than a bank can offer. This may not sound like much, but it will actually save nearly £7,000 on a property purchase of €250,000."
There are less obvious costs to consider too. Lawyers' fees, IVA (European equivalent to VAT), local and national taxes, as well as insurance, must all be met in your host country. This will add a significant amount onto the cost of your home.
Conti recommends planning for a 15% increase on the price tag of a property in Italy and Greece, 12% in Spain, 10% in France and Portugal and 5% in the US.
Of course, the running costs of your overseas home – just like on your UK property – will be ongoing. So budget for utility bills and the cost of cleaning and maintenance.
By virtue of its name, you will only occupy a holiday home for a few weeks in the calendar, so it makes sense to rent it out to like-minded holidaymakers at times it would otherwise be vacant. Certain countries – most notably the US – impose restrictions on the frequency of short-term rentals to protect their own full-time residents from disruption.
In Florida, each county (effectively a council) will insist on a minimum time period for each rental. In Orange County this is 30 days so cashing in on short-term holiday lets will be impossible.
In Spain, you will need to register and seek permission from the local authority if you want to let out your home.
In addition, rent generated on all second homes, both at home and abroad, will be subject to UK income tax. "However, the tax you have already paid in the host country will be deducted from your bill at home," explains Des Rowson, spokesperson for the international arm of the National Association of Estate Agents.
It's also worth noting that, from April next year, UK holiday homeowners will no longer be able to write off 'trading' losses – such as the cost of maintenance and repairs, like a new boiler – from their second home against their tax bill.
But, in something of a 'blow softener' the government also ruled in the last Budget that those owning homes within the EU (but outside the UK) will get the tax benefits currently enjoyed by owners of UK holiday homes until April 2010. However, these will then also be scrapped.
Bear in mind that UK capital gains tax will also be payable on the sale of your holiday home wherever it's based – if the profit exceeds £10,100 for the current tax year.
Protect your property
As soon as your holiday home is paid for, you will want to protect it. The vast majority of UK insurers will not offer cover for holiday homes abroad – as the fact it lies empty for months poses too much risk – but there are some exceptions, such as Hiscox's holiday home insurance package, which will cover any second home.
Using a UK-based insurer rather than one in the country of your holiday home comes with certain benefits, says Laurent Schonbach, spokesperson for Hiscox.
"As well as the fact you are dealing in English, the breadth of cover offered in the UK is generally better than abroad – extras like accidental damage cover for example are simply not available from foreign insurers."
But no insurance will cover you against simply being ripped off so it's vital to tread very carefully when buying a home abroad. Use a UK-based property agent; you can choose one from the regulating trade body, Fopdac.com (Federation of Property Developers, Agents and Consultants) as this will provide you with legal recourse.
Also, never sign a contract that you do not understand, always have your property surveyed and hire an English-speaking lawyer with experience of the destination to check everything is above board.
What are your alternatives?
Not everyone has the funds or inclination to invest in a home abroad. Buying a holiday home with like-minded friends or family will not only half the cost, it will give you somewhere to enjoy together.
But be clear from the start about each party's expectations and set all financial and legal arrangements in writing.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The London Inter-Bank Offer Rate is the rate at which banks lend to each other over the short term from overnight to five years. The LIBOR market enables banks to cover temporary shortages of capital by borrowing from banks with surpluses and vice versa and reduces the need for each bank to hold large quantities of liquid assets (cash), enabling it to release funds for more profitable lending. LIBOR rates are used to determine interest rates on many types of loan and credit products such as credit cards, adjustable rate mortgages and business loans.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.