Paying for a home abroad

The recent boom in the purchase of holiday homes in sunnier climes such as the south of Spain, or Florida, shows little sign …

The recent boom in the purchase of holiday homes in sunnier climes such as the south of Spain, or Florida, shows little sign of abating.

But what is the best way to fund the purchase of that perfect seaside pad in Portugal or the second family home in Florida? Should those investing in property abroad take out their mortgages with a local lender - or are they better off sticking with their own bank or building society in the Republic?

According to agents selling homes overseas, a lot of people opt to borrow money in the place they plan to buy, mainly because they can then use the property as security. By contrast, if they borrow at home, Irish institutions are not in a position to repossess the property in the event of a default on the loan and usually demand other forms of security.

"Irish institutions invariably require Irish security, which usually means re-mortgaging your home, and ups the stakes considerably," says Mr Jason Higgs of Cork-based HD International Properties, which sells property in Spain, Portugal and Florida. "As a result, the vast bulk of people we deal with get their mortgages abroad."

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For those who are using rental income to offset the cost of the mortgage, another advantage to borrowing overseas is that they are not exposed to currency fluctuations. This is no longer an issue for those buying inside the euro zone, where the exchange rate between the peseta and the Irish pound, for example, is fixed. But for those purchasing property in the US, it means that the rent is received in dollars which can then be used to pay the mortgage, regardless of the dollar/euro exchange rate at the time.

But there are also disadvantages to taking your mortgage business offshore.

On the downside, Irish people borrowing abroad generally have to stump up larger deposits than locals. Estate agents say that the maximum mortgage available to a non-national in the US is 80 per cent of the property's value, while in Spain, institutions will only loan up to 70 per cent - and in some cases, as little as 50 per cent - compared to 90 per cent at home.

However, they also note that most of those buying abroad have a certain amount of cash to invest and often don't need to take out the maximum mortgage.

Interest rates may also be less competitive than in the Republic. Rates in Spain, one of the most popular destinations for Irish homebuyers and a fellow euro member, are now broadly similar to the Republic. However, those buying in the US or Britain face considerably higher interest rates at present.

In some countries, there may also be difficulty in borrowing. Portugal, for instance, is regarded as problematic for overseas borrowers, so those keen on a home in the Algarve may have to go offshore to Gibraltar for funds or look closer to home.

One of the simplest ways around the process is if the developer offers a built-in finance package, as happens in some cases.

For those who feel safest borrowing from someone they know and trust, both of the main banks say they do some lending in this area. However, Bank of Ireland says most of its mortgage lending for properties overseas is to those buying in Britain.

"We lend for Spain to a much lesser degree. That is a trickier situation, because the security issues are greater and we would not have a huge amount of knowledge about the market or legal system further afield than the UK," a spokesman for the bank said.

Meanwhile, AIB said it looks after its existing mortgage holders who are seeking to buy abroad but does not generally advertise this service and each case is dealt with on an individual basis.