Tread softly on foreign equity products

There is a new product which will let homeowners release some of the value that may have built up in their foreign properties, writes Fiona Reddan

PROPERTY-OWNERS have been releasing equity on their Irish homes for some years now to finance foreign property purchases.

Now a foreign equity-release product has just been launched on the market, which will enable homeowners to release some of the value that may have built up in those foreign properties.

An equity release loan allows homeowners to increase the mortgage on a property while at the same time reducing the stake that they own. In return for a cash lump sum, homeowners increase their borrowings on the property and their monthly repayments.

The ACAP Group, which provides mortgage products for the purchase of residential and commercial property at home and abroad, says it is the only Irish foreign mortgage intermediary offering equity release on foreign properties.

Despite the popularity among Irish investors for buying properties in eastern Europe, as well as countries such as Turkey, the product is limited to properties in France, Portugal, Spain, the US, and Germany.

Patrick Daly, a director with ACAP, says the firm is currently focusing on these markets because that is where most of the interest from homeowners is coming from and because the levels of red tape in eastern European countries make such schemes more difficult.

However, he says the company will look to expand into other countries, particularly Poland, further down the line.

The terms of the product differ from country to country and the percentage of funding available is defined by the location of the property, varying from 60-80 per cent.

In France, for example, homeowners can borrow up 80 per cent of the value of their property but no more than 100 per cent of the purchase price on a variable rate of 4.95 per cent for between three to 30 years. In Spain however, only 70 per cent of the value of the property can be borrowed and it is more expensive than the French option, at an interest rate of 5.76 per cent.

The equity release is measured on the property's current market value minus the remaining mortgage against the property, and 60 to 80 per cent of that value is then available as cash.

So, for example, if a homeowner owned an apartment valued at €200,000 in Perpignan in the south of France, with an outstanding mortgage of €50,000, they could release up to €120,000 in cash from that property.

Interest-only options are also available in most countries covered by the scheme - for example in the US, homeowners can avail of the interest-only option for up to five years of the term of the mortgage, but this period cannot exceed more than 20 per cent of the overall term of the loan.

Daly says that an advantage of arranging an equity release product through ACAP is the strength of its relationships with banks across the world. In the US, the firm works with banks such as Wachovia and Bank of America, while in Europe it has relationships with Banif and Deutsche Bank.

This means that customers can benefit from more competitive interest rates than they might have otherwise been offered.

The equity release is secured solely on the foreign property, which means that the homeowners' other assets, including the family home, would not be affected in cases whereby they defaulted on the mortgage.

The money generated by taking out an equity release loan can be used for anything, but often includes the purchase of an additional property or holiday home, a home extension or refurbishment or it can be used to pay down existing debt.

In general, Daly says banks assess the suitability of homeowners for equity release based on debt-to-income ratios and would look for a ratio of about the 35 per cent mark.

While liquidity in countries such as Portugal and France is still accessible, Daly says that it has become more difficult in Spain, which is in the throes of a property crisis. It is this crisis though which makes the equity release product even more attractive to investors with properties in Spain, he adds.

"Some homeowners may be looking to sell their Spanish properties, but in order to do so, will have to take a price cut of between 20 to 30 per cent. So instead of selling, they can release their funds by taking out an equity release loan," he says.

However, while equity release has its attractions, it is not without risks and these may be greater on foreign properties. The greatest risk for homeowners is that they might lose their foreign property.

Last year, the Financial Regulator warned homeowners to look at all their options and get independent advice before using an equity-release scheme to release money from their home.

It recommended they consider their future financial needs before entering into such schemes, as a risk is that by borrowing against the property, you may not have enough money in the future to meet the repayments. Instead, it urged homeowners to consider other options for raising cash.

Brian Culliton, managing director with Foresthill Financial Planning, would encourage homeowners looking at such a scheme to be "very careful" and "proceed with caution".

"Just like people going out to buy foreign properties, people should do their homework when it comes to such schemes so they don't suffer from a drop in property values."

The prospect of falling into negative equity may be a reality, as the current economic slowdown and turmoil in the financial sector has seen house prices fall around the world. By taking out a loan based on a valuation of a house today, homeowners may be in jeopardy of negative equity if house prices continue to fall, even if the maximum amount available to borrow against is 80 per cent of the value of the house.