The credit markets work differently in different countries. Europe and the US are both mature credit markets but they work very differently from each other. While the credit system in the US is based on a credit score the European system is more open and it is up to each bank to decide how much weight they but on different factors. The European system will not award you for having a lot of unused credit cards. The system is not focused on building a credit but rather on your wage and how well you have managed your obligations in the past. Most European systems will look favorably upon the fact that you do not have any previous credit. Something that is a must to attain a high credit score in the US.
When you start looking at less developed markets you will see an even greater differences and it can therefore be very hard to know what to expect when you are looking for a loan abroad. It is very important to make sure that you know all the rules. You can never assume that something is in one way because it has been like that in other markets. If you do you might end up loosing your property due to not fulfilling an obligation you did not know that you had.
I recommend against using foreign banks or finance institutes to finances your property abroad. It is always better to try to secure financing at home before you go down to look at properties. This is true in almost all countries regardless of whether they make credit available to you or not.
Why you should not borrow money abroad
There are numerous reasons for why I never recommend borrowing money abroad. The most important reasons are:
- The interest rates are often high. This is true even in countries with low interest rates. This is due to the fact that you have no established credit record in that country nor do you have an income that they can based their decision on. They will therefor have to charge you a higher interest rate since they have to assume that you are a high risk lender. (even with security in the property). It is usually 1- 15% cheaper to borrow the money in your native country. Provided you live in a low interest country like the US or norther Europe.
- The rules can be very different and there might be regulations that you are not aware of. It is easy to miss something. This is true even if the bank tries to explain everything.
- You can not deduct the interest rate on foreign loans.
- It can often be hard to get a loan.
- It can be very hard to make payments on the loan. You will have to make an international wire transfer to an account in the country where you got the loan. Wire transfers can be expensive and takes several days to complete. The alternative is to trust someone in the country with money so they can make the payment for you. There are many horror stories where the trustee have kept the money themselves or charged obscenely large fees for making the payments.
- It is easier for the bank to foreclose on your property. If you buy a property abroad then it is often very hard for your native bank to foreclose on or size that home. It is safe even if you fail to pay your payments. This gives you a property to live in even if you lose your job or encounter other financially problem. Your property abroad can be your escape plan if everything else goes wrong.
- The bank sector can be poorly regulated.
Whether or not it is a good option to borrow money abroad will however always depend a lot on where you want to buy a vacation home. If you want to buy a little cottage by a lake in Sweden you will have access to an excellent banking system that can be a good choice. If you want to buy a house in Nicaragua you will find that there is almost no credit available to foreigners. You will have to research the situation in the country where you want to buy a house.
When is it a good idea to finance abroad
There is one situation when it can be a very good idea to try to finance your purchase abroad and that is when you have a poor credit record in your native country. When doing that, it’s a good idea to apply for loans at credit companies and banks that doesn’t use credit check services that are governmental.
A good example is the Swedish governmental service UC, that is used by most banks. If you apply for a credit without UC, you won’t be registered in the governmental register. If you have mismanaged you economy in your native country you can find it hard, expensive or impossible to find the credit you need. In this case it can be better to try to borrow the money in the country where you want to buy a house. They will not have access to your national credit report and might be willing to give you a more beneficial loan that what your national banks are willing to give you.