|
Overview:
Unless you're fortunate enough to be in a position to buy in cash, you'll be looking for a mortgage to purchase your Italian property. Before you dive in, it's crucial to work out how you plan to pay for everything – not just the asking price of the property itself, but also all the extra costs involved, not forgetting the cost of moving and any necessary renovations.
You will need to consider the potential costs of changing money from pounds sterling into euros. To purchase your property in Italy you will need to convert your pounds sterling into Euros at some point. Although the price of your new home in euros will be fixed, the ultimate cost in sterling will vary depending on how exchange rates move, especially if your mortgage repayments are in euros not sterling. There are many options to consider such as buying all your euros at the outset for a fixed exchange rate (called buying “for spot”).
The Italian mortgage industry is less developed than its UK equivalent. This means arranging an Italian mortgage can be difficult for the overseas buyer and the range of mortgage options is much narrower than those on offer at home. There are, however, several alternative options, including remortgaging your UK property or raising finance from an offshore lender.
It's important to carefully consider your options before you commit to anything and you should consult with a foreign exchange specialist or an independent financial advisor who will be able to explain all the different possibilities. In particular, be sure to check what the setting up expenses and early redemption penalties are exactly as these vary significantly.
Availability:
The Italian mortgage industry is less developed than its UK equivalent. This means arranging an Italian mortgage can be difficult for the overseas buyer and the range of mortgage options is much narrower than those on offer at home.
There are four main options for British investors:
- Taking out a mortgage with an Italian bank secured against your Italian property
- Remortgaging your UK home to release equity to purchase your Italian property and using your UK property as security
- Borrowing from an offshore lender using your Italian property as security
- Taking out a second mortgage in the UK using your Italian property as security
ITALIAN MORTGAGES:
- Italian lenders will assess your eligibility on the basis of your ability to service the loan. The general principle is that 35% of your net income should cover all existing outgoings as well as the monthly repayments on the Italian loan; predicted rental income from holiday lettings will not be considered when calculating your net income for mortgage purposes.
- Italian law accords tenants a very favourable status making it difficult for landlords to evict tenants. For this reason, Italian lenders will generally not lend on a property that is going to be let out permanently meaning “buy to let” mortgages unlikely.
- Obtaining finance from Italian lenders can be difficult for the overseas investor
UK EQUITY RELEASE:
- The UK remortgage market offers a wider range of finance options than the Italian mortgage market, including standard residential remortgages, buy-to-let remortgages and self-certified remortgages
- Requirements will vary but you will need to demonstrate how much unencumbered equity you have left in your house, the overall value of your property and your income (and in the case of buy-to-let remortgages your predicted rental income from the property)
OFFSHORE LENDERS
- Offshore lenders offer both the capital sum and the repayments in most major currencies
- Loans tend to be made with fixed rates and “non-status”, “self-certification” and “buy-to-let” products are not available
UK-BASED MORTGAGE ON YOUR ITALIAN PROPERTY
- Several UK lenders now offer mortgages overseas
- So a fourth option would be to take out a second mortgage with a UK lender secured against your Italian property
- You will normally be required to put down at least a 20 per cent deposit and there will generally be a minimum loan amount
- As with any other mortgage, your income and existing liabilities will be taken into account when assessing eligibility.
These four options are compared in more detail below.
GENERAL
- Mortgages are made on the basis of the lender's valuation; this value may be less than the price the buyer ultimately pays for the property
- As a general rule, your monthly repayments should not exceed one third of your proven net income
Rates of interest:
Fixed or variable rates are available for both UK and Italian loans. Fixed rates are always at a high rate of interest but you can fix the level for up to 15 years, thereby avoiding exposure to interest rate fluctuations.
The Euro has historically been subject to lower interest rates than the pound meaning that Euro mortgages tend to be leant at lower interest rates than their sterling equivalents. However, interest rates in Italy have been high for several years and rates for non-residents are sometimes higher.
Offshore lenders offer some very attractive short-term fixed rates.
Loan-to-value:
ITALIAN LENDERS
Italian banks will normally lend up to 85% of the assessed value of the real estate, although for overseas buyers the maximum amount is usually about 70%.
UK REMORTGAGES
Most UK lenders will loan between 75% and 96% of your UK property as equity release to purchase a home overseas.
OFFSHORE LENDERS
Offshore lenders will loan up to 75% of the bank valuation or purchase price of your Italian property - whichever is lower.
UK MORTGAGE ON ITALIAN PROPERTY
UK lenders offering mortgages secured against your Italian property normally offer a maximum of 80% LTV.
Repayment periods:
UK residential remortgages are offered over 5 – 30 years with 25 being the norm (depending on income and age). Italian mortgages normally have shorter repayment periods (a 15-year term is typical), which can make monthly repayments prohibitively expensive. Buy-to-let UK remortgages offer the longest terms lasting for 75 years. Most lenders apply early redemption penalties throughout the lifetime of the loan.
The main options compared:
An obvious option for UK purchasers would be to sell their main home in the UK in order to purchase their new home in Italy. This might make sense if a UK purchaser is looking to relocate to Italy permanently. However, if there is even the slightest chance that a purchaser might wish to return to the UK in future, it would normally make better financial sense for them to hold on to their UK property if at all possible. The UK market tends to grow at a consistently higher rate than many other European markets and by not owning UK property, there is a strong risk that expats wishing to move back to the UK at a future date will find themselves priced out of the market.
If a UK investor is not looking to sell their UK home and does not have sufficient funds available to buy in cash, then there are four main ways of raising finance to purchase property in Italy:
1. A Euro mortgage from an Italian lender secured against your Italian property
PROS
- The interest rate of Euro mortgages is linked to the EURIBOR (European Inter Bank Offered Rate) which has been lower than the Bank of England rate for the pound since the Euro was first introduced. EURIBOR rates also tend to fluctuate less than the Bank of England base rate.
- However, in practice, interest rates in Italy have been high for several years and rates for non-residents are sometimes higher.
- Your UK assets are protected as foreign banks have no right of repossession.
CONS
- In practice this option is difficult to achieve.
- Taking out a mortgage in local currency will expose you to the risks of exchange rate fluctuations, leading to fluctuating monthly repayments. However, if you receive a regular income in the local currency (e.g. rent) that is sufficiently high to cover your mortgage repayments, you will avoid the need to transfer money from sterling to euros and in the process avoid the risk of exchange rate fluctuations.
- Actually making repayments will also be more expensive, because unless you are able to take the money over to Italy each month in person, you will have to arrange an electronic bank transfer through your UK bank at a cost.
- It will be more hassle and time-consuming to raise finance in Italy rather than sticking with the system you're familiar with in the UK .
- Overseas mortgages are not under the protection of the UK Consumer Credit Act of the UK Mortgage Code.
- Set up costs for Euro mortgages are higher and Italian lenders fees tend to be the highest in Europe.
- Euro mortgages tend to offer less flexibility than their UK equivalents with a narrower range of products available.
- Italian mortgages normally have shorter repayment periods (a 15-year term is typical), which can make the monthly repayments prohibitively expensive.
2. Remortgaging your UK property in sterling
PROS
- It will probably be less hassle and less time-consuming to raise finance in the UK and you'll be using a system and lender you're familiar with.
- UK mortgages will fall under the protection of the UK Consumer Credit Act of the UK Mortgage Code unlike their Italian equivalents.
- The initial set up costs will be lower as you avoid the cost of setting up a Euro mortgage.
- UK mortgages tend to offer more flexibility than their Italian equivalents with a broader range of products available.
- Taking out a sterling mortgage will insulate you against the risks of exchange rate fluctuations.
- Remortgaging in the UK will avoid the cost of having to transfer sterling into euros each month.
- UK mortgages tend to have lower monthly repayments.
CONS
- The Bank of England base rate has always been higher than the European Inter Bank Offered Rate (EURIBOR) since the Euro was first introduced and EURIBOR rates also tend to fluctuate less than the Bank of England base rate. Consequently, interest rates on sterling mortgages are generally higher than those of euro mortgages; in practice, however, Italian mortgages are subject to high interest rates.
- Both your UK and your Italian homes are forfeit should a problem arise with your mortgage repayments.
- You will need a substantial amount of unencumbered equity (i.e. the difference between what your property is worth and what you will owe on your mortgage) in your UK property or be able to show other significant financial resources such as income.
3. Offshore loan secured against your Italian property
- PROS
- Offshore mortgages offer the possibility of taking out a mortgage and making repayments in most major currencies.
- CONS
- Offshore lenders demand a lot more stringent proof of financial standing and will usually include a UK credit check as a pre-requisite.
4. Mortgage on your Italian property from a UK lender
- PROS
- Taking out a second mortgage via a UK lender against your Italian property means your UK home is not at risk.
- CONS
- You will normally be required to put down at least a 20 per cent deposit and there will be a minimum loan amount.
You should consult with a financial advisor who will be able to talk you through your options.
Sources & Resources:
|
Mortgage Finance:
Sponsored listings: