Funding a European property purchase

There are a number of different methods to fund the purchase of a European property:

• via a mortgage from a mortgage lender in a European country
• via a mortgage from a mortgage lender in your country of residence
• by re-mortgaging your existing property if you have equity in your existing property
• via a portion of your savings

Properties In Europe does not intend to offer financial advice, and suggest that you seek professional independent financial advice in order to choose the best method to fund your European property purchase. The following sections, however provide a summary of the different methods to fund the purchase of a European property, highlights interesting points and discusses typical scenarios for each method.

Properties In Europe recommend that UK residents contact TQ Mortgage Service who are fully qualified independent financial advisors (IFAs). TQ Mortgage Service will be happy to advise you of the most suitable way to fund the purchase of your European property.

European mortgage

Some people choose to take out a mortgage with a European mortgage provider. Typically, interest rates for borrowing in Europe are slightly lower than in the UK. However, this does not necessarily mean that someone in the UK is better off taking out a European mortgage as the Euro (€) may strengthen against the UK Pound (£) with time.

When considering whether or not to take out a European mortgage, you should also consider the exchange rate between the currency of the country you live in and the Euro, and how you intend to cover the mortgage repayments.

If for example, you take out a European mortgage (which would be paid back in Euros) and you intend to pay off the European mortgage from the currency of your country, then you may want to be sure that the currency of your country will not weaken with time in relation to the Euro. If the currency of your country weakens with time in relation to the Euro, then your mortgage payments in your own currency would increase.

If however, you take out a European mortgage (which would be paid back in Euros) and you intend to cover the European mortgage payments from a rental income paid in Euros by your tenant, then a potential exchange rate fluctuation will make no difference to you ongoing European mortgage repayments. When deducing if the rental income from a tenant will cover the European mortgage payments, you should typically account for the property being rented for 10 months of the year.

From the examples immediately above it is clear that if you are renting out the property and the rent which covers the European mortgage is paid in Euros then the European mortgage repayments are not affected by exchange rate fluctuations. However, if you are intending on covering the European mortgage payments from an income in the currency from your own country then the European mortgage repayments are affected by exchange rate fluctuations.

Mortgage from your country of residence

Some people choose to take out a mortgage within the country they are resident within in order to fund their European property purchase.

When considering whether or not to take out a mortgage from your own country of residence, you should also consider the exchange rate between the currency of the country you live in and the Euro, and how you intend to cover the mortgage repayments.

For example, a mortgage in the country of your residence may have a higher interest rate than a European mortgage, but could still be considered a safer approach if you are intending on paying back the mortgage using the currency from your country. This is because the method of paying back the mortgage is not affected by exchange rate fluctuations.

If however, you intend to rent the European property out to a resident of that European country, then your income to cover the mortgage payments would be in Euros. In this case the monthly payments on a mortgage from within your country would be affected by exchange rate fluctuations between the Euro and the currency in your country of residence.

From the examples immediately above it is clear that if you are renting out the property and the rent which covers your mortgage is paid in Euros then the mortgage repayments are affected by exchange rate fluctuations. However, if you are intending on covering the mortgage payments from an income in the currency from your own country then the mortgage repayments are not affected by exchange rate fluctuations.

Re-mortgaging your existing property

A person may have lived in their main residence for a substantial period of time. The person's salary may have gone up with time, and the value of the person's property may have also gone up in value with time. In this case the person is considered to have "equity" in their property as they are generally able to borrow more money secured on their main residence.

Some people choose to re-mortgage their main residence to release the "equity" they have gained, and typically use the extra money they borrowed with re-mortgaging to pay for home improvements, a car, or a second property. Some people use the re-mortgaging of their main residence to fund the purchase a European property because there is typically less paperwork involved with their existing mortgage lender.

When considering whether or not to re-mortgage your main residence, you should also consider the exchange rate between the currency of the country you live in and the Euro, and how you intend to cover the mortgage repayments.

For example, a re-mortgaging in the country of your residence may have a higher interest rate than a European mortgage, but could still be considered a safer approach if you are intending on paying back the mortgage using the currency from your country. This is because the method of paying back the re-mortgaged amount is not affected by exchange rate fluctuations.

If however, you intend to rent the European property out to a resident of that European country, then your income to cover the extra re-mortgage payments would be in Euros. In this case a the monthly payments on a re-mortgage from within your country would be affected by exchange rate fluctuations between the Euro and the currency in your country of residence.

From the examples immediately above it is clear that if you are renting out the property and the rent which covers your re-mortgage repayments is paid in Euros then the mortgage repayments are affected by exchange rate fluctuations. However, if you are intending on covering the re-mortgage payments from an income in the currency from your own country then the mortgage repayments are not affected by exchange rate fluctuations.

Note: Some people are more than happy to re-mortgage their main residence to fund the purchase of a European property and rent the property out to a European resident in Euros. Many of these people take the view that their re-mortgage is not dependent on the exchange rate as the are accounting for the extra re-mortgage repayments with their own higher salary, and not the rental income from the tenant. This view is open to opinion, very subjective, and is only valid if the particular individual is very disciplined with their higher salary, and uses there higher salary to cover the re-mortgage payments. If a particular individual is not disciplined with their higher salary then this view is not valid, and the re-mortgage payments are affected by exchange rate fluctuations as they would have to rely on the tenants rent from time to time. Another issue to consider with this opinion, is if an individual has a pay cut, loses their job, or is unpaid between moving jobs. In these cases, the individual may not be able to maintain the mortgage repayments with their normal income, and would then have to rely on the rental income from the tenant, which is again dependent on the exchange rate fluctuations.

Using your savings

Some people have saved a considerable amount of money throughout their life, and choose to "pay cash" for a second property. If you have saved a considerable amount of money of a number of years, then you may want to consider using some of your savings to purchase a European property.

Many people take the view that even with if they have a large amount of savings, they still prefer to borrow money as borrowing money instead of paying outright with some savings, allows them to increase the potential profit on the resale of their property in the future. For example, if somebody has £100,000 savings, they may choose to put down a £20,000 deposit and have an £80,000 mortgage. They would then still be earning interest on the £80,000 they have in the bank and the mortgage repayments would be made by the rental income. Then when coming to sell their property in the future for say £110,000 they make £10,000 profit. In this case they have made 50% profit as they only put down £20,000 opposed to just 10% profit when paying for the property outright.

People who tend to be in the in the early to middle stages of their career, and who have some considerable savings tend to use some of their savings and take out a separate mortgage, or re-mortgage their existing property in order to fund the purchase of a European property. Whereas, people in the mature stages of their career, or who have retired tend to use all of their savings to purchase a European property outright.