Sun and sand, or snow and skis - we all have our vision of the ideal holiday home. But when you finally decide to buy it, if you are not one of the wealthy few who can pay cash outright, you will need to find a mortgage. And, with such a wide range of options on offer, choosing the right one can be just as difficult and crucial as selecting the overseas property itself. To take possession of the property, of course, you will have to do more than get a mortgage. You will also need to follow the laws and the tax obligations that vary from country to country. Experts agree that it is important to seek advice before, during and even after securing a mortgage for an overseas property. Does it matter when I get the mortgage? It is possible to buy a property first and source financing later if you have enough money to fully pay for the property first. However, applying in advance for a credit line and having a clear budget will save time and aid in negotiations with the vendor. Can I afford it? You are positive that a condo in the mountains is a great deal and do not want to miss the opportunity to buy. But how much do you have to spend? Affordability is simply a matter of calculating how much you can borrow in relation to your income. Each lender will have a lending limit which is a ratio of the actual loan to the price of the property, called the loan to value ratio (LTV). A common LTV is now normally not more than 80 per cent of the purchase or valuation price of the property and is usually reduced for multicurrency loans, according to Barry Lea, deputy regional chief executive, Lloyds TSB Bank, International Mortgage Service. This means, you will need to come up with 20 per cent of the purchase price in the form of a deposit. Borrowers, who already owned property or had money on deposit, might qualify for up to 100 per cent LTV if additional suitable security was available at certain banks, Mr Lea said. How do I find a mortgage provider? You can either go directly to a bank and do the legwork yourself, asking each in turn what mortgage package they can offer, or you can submit just one application to an independent financial adviser (IFA) who will shop around for you. An IFA, unlike a bank, also assists throughout the life of the mortgage. 'Financial planners do not lend money directly,' said Jimmy Millar, property services manager at Financial Partners, whose company specialises in offshore financial planning and wealth management services. An IFA's strength is market knowledge and ability to advise on making a mortgage choice that best suits your needs. He said: 'A bank will naturally be promoting its own products.' While a property consultant or IFA can point you in the right direction, word-of-mouth is probably the best way to find an overseas property mortgage lender in Hong Kong because they do not do a lot of advertising and they are not necessarily the same banks that provide mortgages for local properties. Ultimately, make sure to ask if the bank has overseas mortgage facilities in Asia, or if it is merely an arm of an overseas bank. 'Some banks in Asia act as 'post offices' for their parent operations overseas, which may cause delays and other frustrations,' Mr Millar warned. Are their hidden fees I should know about? First find an adviser or bank that has been in business for a long time and has a solid track record. However, you should still ask about the charges, which will include the solicitors' and valuation fees, plus the lender's setting up and administration fees. The exact cost of the fees will vary depending on the currency, the country where the property is, the value of the property and more. However, there are some general guidelines that may help you budget. [see box] 'It is worth bearing in mind that the cheapest [initial fees] might not be the best over the long term,' Mr Millar said, because fees were not always straightforward. 'What may look like a good offer,' he warned, 'may tie you in with heavy penalties for a long time.' Be aware of how the interest was calculated, he said. 'If the interest is calculated annually then you may find that the overall cost of your mortgage will be a lot higher than if the interest is calculated daily. 'One point to remember is that when lenders talk about solicitors' fees they are also talking about theirs, and this often comes as a surprise to clients.' Some of these fees can be added to the mortgage so if you would prefer that make sure to ask. For example, when purchasing, in most cases, only the lenders arrangement fees can be added, while for remortgages, most fees, bar the valuation, can generally be added. Why do they keep asking about rates? The second phase of securing a mortgage begins once an IFA is selected or you negotiate directly with a bank. After completing the paperwork associated with the application process talk will focus on how you want to structure the mortgage including your preferred interest rate and currencies. Considerations will include: the choice of paying the principal plus interest or interest-only, using a fixed or variable rate; the loan term; and which currency you wish to borrow in. Andrew Macintosh, general manager of banking at National Australia Bank in Hong Kong, said generally, for an overseas property investment that will have rental income, an interest-only mortgage was best. An interest-only loan means repaying capital at the end of the agreed loan term and not as part of the regular monthly or quarterly payments. The theory is you can use the rent to pay the interest on the mortgage and when, hopefully, the property rises in value you can sell, pay the remaining principal and pocket the profit. Of course a risk is that if the property does not appreciate or even falls then your selling price might not cover the full loan repayment. Mr Lea said whether to opt for fixed or floating rates required careful consideration. Even when a fixed rate ends a variable rate will need to be applied. 'While a fixed rate provides a degree of certainty and assists with cash management, many mortgage lenders offer fixed rates for one reason only, to buy your loyalty,' Mr Lea said. 'The fixed rate is usually set for a relatively short period in relation to the life of the loan, so you should ensure that the lender will offer a competitive variable rate mortgage at the end of the fixed rate term.' With a fixed rate, if you repaid your loan within a set period you would have to pay an interest penalty typically equivalent to three months interest, but sometimes as much as 12 months interest, said Mr Lea, who called early repayment penalties on fixed rate mortgages 'crippling' and noted the average life of an offshore mortgage was only five to six years. Fixed rate borrowers can potentially outsmart the market but variable interest rates have also proven to provide lower costs over the life of the loan. 'As the events of recent years have clearly demonstrated accurately predicting the future trend of interest rates is very difficult. Fixing rates is a gamble and, as with any form of gambling, you may win or lose,' Mr Lea said. Mr Millar said negotiating interest rates would also be difficult in the present climate. 'Rates are low now, so unless you are borrowing a very high amount I doubt if the lenders would be happy to negotiate. At the moment, lenders are keen to offer variable rates due to the state of low interest rates. However, Australia could be the exception because it has just raised its interest rate.' Large loans were those of HK$15 million and above, Mr Lea said. The good thing for those willing to shop is that mortgage products in Hong Kong vary substantially based on banks' credit risk appetites and the client's finances. That is, how aggressively a bank wants new business, and whether they want market share in the part of the world where your property is. This is the first of a two-part series on securing an overseas mortgage. Next week we will look at mortgage terms and currencies. Fees These are approximate figures. Arrangement fee (administration and setting up) Calculated as a percentage of the loan amount. Non-refundable. Property in Britain, France, Spain, Portugal, Australia, Canada and New Zealand: 0.5 per cent. Property in America: 1 per cent. Commitment fee Applicable to US properties only, 0.3 per cent of the loan amount. Non-refundable. Legal fees Both the borrower's and the bank's legal fees, upwards of GBP500 (HK$7,664). Valuation fee Generally from GBP250 Sales Tax (stamp duties) 1 per cent and upwards (differs between countries). Communication charges and building insurance Varies depending on country where the property is. Currency switching fees Vary. Normally two free switches a year.