WITH more people buying overseas residential property, banks, loan institutions and mortgage brokers now offer a wide range of facilities. Many borrowers, buying for investment purposes, require options such as currency switching, flexible repayment schedules and redrawing opportunities. Choosing the right mortgage can be as difficult and as crucial a choice as selecting the property itself. Six points for financing. What interest rate will you pay? It is not sufficient to take for example a claim that a loan would cost 10 per cent per annum as an accurate statement of bottom line cost. This is because there are a variety of ways of charging interest. The solution is simply to check what the actual repayment figure would be over a given term, say one year, since this is what really matters. Ascertain also the lenders' system for dealing with interest rate changes since time lags could be expensive. In the case of deferred interest ''low start'' mortgages, remember the looming future increase in repayment cost. If you opt for a fixed interest rate have regard to the term and any hidden fees or penalties. What other costs should you look out for? Some charges are more obvious than others. Most lenders charge an arrangement fee for the loan, also known as an application or processing fee which is either a flat fee or a percentage of the advance. Check to see if this is an up- front charge or whether it will only be levied at a later stage - eg. on your formal acceptance of the loan offer letter. Remember that legal fees will likely be for your account along with any valuation fee. Watch out for interest rate penalties which are occasionally levied by UK institutions who are lending to expats and in the case of properties which will be let rather than owner occupied. The biggest sting is likely to be early redemption penalties which may apply for a couple of years or during the whole life of the loan and could run to the equivalent of three months' interest. You should also ask whether or not you will be required to top-up the security for the loan if there is a movement in relative exchange rates or a drop in the property's value. An additional cost may take the form of life insurance to cover the amount of the loan. If you borrow a high percentage of the value of the property you may be required to take out indemnity insurance (also known as a mortgage guarantee policy) to cover the additional amount. What repayment method should you opt for? Apart from the straightforward capital and interest repayment method there are many schemes on offer. The most commonly encountered include interest only, life-linked endowment, savings plan linked, pension and lump-sum linked. The choice will come down to personal circumstances and aspirations. A desirable facility is the ability to switch repayment methods so as to enhance flexibility. All mortgage types carry some degree of risk but some more than others. In the case of investment-linked mortgages you will be relying on growth in the value of the underlying funds to provide a sum sufficient to repay the loan. If there should be a shortfall then you will have to make up the difference. There are also tax implications to consider which vary according to the chosen repayment method. What currency should the loan be denominated in? To be locked into one particular currency over the repayment period may be inappropriate given the situation faced by many professionals and business people in this region. It could well be more appropriate to seek a multi-currency option with the facility to finance in one currency today and retain an option to convert into any other major currency at a later date. Generally speaking, it is wise to match the currency of your assets with that of your liabilities - eg. UK-based property and sterling loan would match a fixed asset with the loan liability. Many people opt to match more liquid assets with the loan. Anyone considering a mis-match between the currency of the loan and their assets should tread carefully. Significant movements in currency cross-rates can happen quickly, wiping out any savings through lower interest rates and leaving the borrower stranded. Playing the forex markets with your mortgage monies is definitely not for the feint of heart. What are the special considerations when re-financing? If you are simply looking to replace an existing loan rather than to take additional equity out of a property then the fundamental issue is to determine whether or not the move will save you money and the gain outweigh the hassle. Your existing loan may carry onerous early repayment penalties or at least a period of notice and don't forget the set up cost for the new arrangements - ie. processing charge, legal fees, valuation and so on. Note also that your new lender may not acceptan existing investment plan as a repayment vehicle. Do the sums and calculate exactly how long it will take you to recover these costs. If it's a further advance that you require then it makes sense to approach your existing lender first - some lenders will refuse to make an advance against a second charge on a property. Can I organise the mortgage before I have found the property? Yes, It has become common practice for intending buyers to secure pre-arranged finance, also known as an advance credit line. In this way they would have a good idea of the financing available or the amount which they could safely borrow, before proceeding abroad and hence save themselves time and trouble while overseas. Barry Lea is regional director for marketing with Hill Samuel.
