Finding a loan at home

I strongly recommend that you finance your property in your home country before you stat looking at properties abroad. This will almost always give you more beneficial terms and it will be easy to make the payments. You will be able to keep track of your loan right from your own computer.

How to find a loan

cashMost banks and financial institutes will not accept foreign property as security for a loan. There are some exception from this rule but I am not going to talk about those here because if the property you want to buy can be used as security then you will not have any problem at all financing your purchase. (Simply ask your bank to find out)

If you can not use your foreign property as security then you are left with two options.

  • Using a unsecured loan. Most banks offer unsecured loans.
  • Using something else as a security. If you have something else you can use as a security then you can reduce the rate you have to pay.

Unsecured loans

Unsecured loans are loans that are not associated with any security. Your house and car loans are not unsecured loans since the bank have security in the car and house. Most banks and financial institutes offer unsecured loans. How much you can borrow varies a lot between different banks.

The bank will choose whether to give you a credit or not based on your credit report and your income. These two factors will decide whether you can get an unsecured loan, how high interest rate you have to pay and how much money you are allowed to borrow.

It is rare to find a bank that is willing to loan you more than $50-100 000 as an unsecured loan. To get that much you have to have a high wage and excellent credit.

An unsecured loan can therefore only be used to buy a cheap property or to get the down payment needed to buy a property.

Unsecured loans cost more than secured loans.

Using something else as security

A better option is to use something else as security for the loan. By using a secured loan you can borrow more money and get the lowest possible interest rate. There are two common types of securities that you can use to finance a purchase of a property abroad, your home or investments.

Using your home as security

homeIf you got extra equity in your home you can use that as security to borrow the money you need. Your home is usually the best security you can use. Mortgages have long maturities and low interest rates. This all mean that you can borrow a lot of money without having a large increase in your monthly payments.

There are a number of reasons that you might have extra equity in your home.

  • The value of your home have increased since you purchased it.
  • You have paid down your mortgage
  • You have performed renovations that have increased the value of the property.

Ask your bank to see if you can increase your mortgage to be able to finance your property abroad or a part thereof. It can be good to talk to a Realtor first to see if the prices in the area has gone up. If you have made renovations you might even want to have an appraiser that is trusted by the bank come and appraise your home.

Using investments as security

If you have money invested in stocks and other investments you can use those investments as a security for a loan. This is often a more expensive alternative than using your home as security due to the fact that the loan you get using investments as security will usually require larger monthly payments due to a short maturity.

Using your investments as security for a loan makes it possible for you to buy the property you want without having to sell your investments. You can keep earning returns on the investments and get your dream house.

It is important to know that you can never borrow the full value of your stock and other investments. The security value of a stock or other investment varies a lot. The value can different between banks but also between different stocks. You might be able to borrow 70-80% of the value of blue chips stocks such as IBM while you might not be able to borrow anything at all using a high risk stock as security. You will have to invest in high end low risk stock if you want to use them as a security. You might have to provide additional security if your stock goes down. If you do not provide extra security the bank will sell your stock to cover your position.

I recommend against borrowing more than 50% of your blue chip portfolio if you want to be certain to avoid forced liquidation of assets. If you borrow no more than 50% you should be able to survive most crashes in the stock market without being forced to sell of your investments to cover the position. The more you borrow the higher risk you assume.