Financing a property abroad

It can be hard to realize the dream of owning a house abroad. A vacation house where you can one day retire. This is in large part due to it being a lot harder to finance a property abroad then it ever is if you want to buy a property in your native country. Some countries such as Spain makes it possible for foreigners to get good credit but the house prices in these countries have often been inflated to extreme levels.

tropical houseHouses in many Mediterranean countries remain in a bubble despite the price correction that has taken place since 2008. To many house owners and developers have mortgages that keep the price artificially high. It is better to price the house at a price no one wants to pay it at than to admit that the property is worth less than the mortgage. There are many thousand empty apartments and villas that stands empty because the prices are too high for them to find buyers. There need to be a second price correction if these properties are ever going to be sold. The situation is similar in many other markets.

It is important that you understand that not all Mediterranean properties are over priced. Property in Monaco is among the most expensive in the area but is still likely to keep going up. There is a large demand for these properties and a very limited supply.

Monaco is a good example that show you how important it is to understand the market you are investing in. If you do not you risk making a poor purchase. Properties in Monaco are likely to keep going up in value. However, a villa just a couple of kilometers outside of Monaco are likely to go down when a price correction takes place. The reason for this is that a property in Monaco will give you tax benefits that the one outside Monaco will not. Always make sure that you know which factors are driving prices in the area you want to invest in.

With that said. Lets look at a couple of ways that you can finance your purchase abroad.

Saved money

cashThe easiest option is always to use your own money to buy your house. To liquidate some of your investments to be able to pay cash. If you are lucky enough to have enough money to do this.

This is however seldom a good idea. If you have enough money saved to buy a house abroad than you can usually qualify for cheap credit that allow you to buy the house and keep your investments. You can expert to earn a lot of money by doing this at the moment since the interest rates in the USA and Europe are very low at the moment. If you pay 2% on the loan and get a modest 5% return on your investments you will end up earning 3% of the purchase price each year by borrowing the money rather than using your own saved money.

If you trade high yield financial instrument such as digital options, CFD:s or Forex certificates then it can be worth borrowing the money for your house even if you have to pay high interest rate.  It is better to borrow the money if you can get a higher return on your savings than the interest rate.  This is true regardless of how high return you can earn on your money and regardless of how high the interest rate is.

If you do not have enough money to buy a property abroad you should still try to save enough to be able to pay a down payment. This is often necessary to be able to borrow the rest.

Owner financing

Owner financing offered by individuals can be a very good alternative to be able to buy a property that you might not otherwise be able to buy. Some owners are willing to offer 0% interest financing if they want to sell their home quickly. You will usually have to pay 10-15% as a down payment. It is important that you understand that you will usually lose the house and the money you have paid so far if you fail to pay your payments as agreed in the contract.

owner financeOwner financing that is offered by a developer is usually not a good deal. Yes it does allow you to buy a house you might otherwise not afford to buy but it is often possible to find cheaper properties of the same standard. The houses is often over priced to start with and the financing terms is usually less than favorable.

If a developer is offering you a 0% owner financing you can be certain that he have already adjusted the price upwards to offset the lost interest.

Owner financing can make it possible for you to buy a house you would otherwise not be able to buy but is usually only a good deal on the second hand market. Read more here.

Borrowing money in your home country

Borrowing in you own country is often the most favorable option if you are able to get a loan. This can often be hard since most banks wont accept a property abroad as security for a loan. This means that you either need to be able to get an unsecured loan or be able to offer another type of security. The most common ways to secure a loan at home is to:

  • Use a small unsecured loan. If you are looking to buy a cheap property abroad then it might be possible to get a unsecured loan to pay for the house or at least the part of the purchase price you need to borrow. This can also be a good way to borrow for a down payment.
  • Increasing your mortgage. If your property have increased in value or if you have paid down you mortgage you might have extra equity that you can use to borrow more money that you can use to purchase your property abroad. This is usually a very cheap way to lend money but it does use your home as a security. You risk loosing your home if you can not pay your mortgage.
  • Borrowing money using investments as security. It is often possible to use stocks and other investments as security for a loan. You can usually not borrow the stocks full value. Borrowing money against your investments can be an excellent way to be able to buy the property you want without having to sell any investments.

You can read more here.

Borrowing money abroad

Borrowing money abroad can be hard and confusing. Many poor countries have systems where it very hard to get credit unless you are an established citizen with a lot of assets. It can be impossible for foreigners to get access to credit in these countries. It is also common that many countries have a lot higher interest rates than what you would pay in the US or Europe. Rates over 10% are very common.

Developers sometimes offer special credit to the people who buy their properties. This credit is generally very expensive.

I recommend that you refrain from borrowing money in the country where you are buying the property. Secured financing before you go look at properties abroad.