Paying a Mortgage Abroad
Whether you are buying a house for personal use or investment purposes, it is not easy to execute the real estate transaction in a foreign country. There is no set rule of how you should finance the purchase; in fact, it is a very hard decision to make.
The majority of the people does not have enough savings to make a lump sum payment for a property and thus, have to take out a mortgage. There are so many things they have to keep in mind when buying a house, such as make mortgage repayments, risks associated with the currency exchange rates, etc.
Ideally speaking, if you buy a house in a country where you live and work, it will be relatively easier to buy a house as you would be able to choose from different mortgage packages offered by various lenders and it will eliminate the risk of exchange rates. On the contrary, if you are not earning the income in a country where you buy a house, but the purpose of making that purchase is to rent it out, you can use that income to make repayments. The ability to repay, in this case, will depend on the local rental market and would vary over time.
Finding a Bank to Pay Mortgage Abroad
The Canadian lenders only give a mortgage if they can register it against a Canadian land so as to enforce it in a Canadian court if the need be. The same is true for financial institutions in other nations. They will lend money for houses that are within their legal jurisdiction.
In rare instances, you may be able to get a mortgage from a local financial institution if you are able to provide a collateral. But in many cases, domestic lenders don’t offer a mortgage on a property in a foreign country, because they will not able to do foreclosure if a borrower defaults on a loan.
You cannot get mortgage locally in every country, especially if you don’t intend to live there permanently. Moreover, financial institutions might not even give you a mortgage if you are planning to buy it as a holiday house or for investment purposes. In that case, you may have to look for a lender in your home country who also has an office in the country where you intend to buy a property and they deal in the international mortgage or have brokers who deal in such loans.
There are so many Canadian banks who have their offices in other countries as well. In this case, however, a borrower has to coordinate with the foreign branch instead of going directly to the Canadian office. If you wish to buy a house in America, the rules in both countries are quite similar, which will make the process relatively easier. But in case of other countries, getting the loan will be expensive, exhausting and time-consuming.
Another option is to refinance your Canadian property and use the equity to buy a house in a foreign country. The interest rate, in this case, will be lower because you remortgaged your existing property and did not take any mortgage on a new purchase.
Regardless of how you choose to proceed with the making mortgage payments abroad, make sure you discuss it with a financial expert and consider the costs and risks associated with this decision.
Associated Benefits and Risks
There are a number of benefits and drawbacks of making mortgage repayments in foreign currency. Such decisions are typically made when interest rate in foreign currency is very low as compared to the rate in your home country. It allows you to make substantial savings at the time of making repayments.
But you have to be aware of the risks involved in getting foreign currency mortgage. With continuous and rapid fluctuations in the exchange rate, the amount you pay in local currency will also increase or decrease. It is quite likely that you may have to pay a lot of money for a certain period of time due to exchange rate movements.
How to Mitigate Risks
There are a number of ways to mitigate the exchange rate risk when buying a house in another country.
- To avoid the risk of exposure, you can choose to send a large amount of cash abroad when rates are favorable. Although, it would decrease the interest rate charges, you may still not be able to access the loan from abroad. Therefore, talk to your lender in the country of residence about the applicable rules.
- You can also limit the risk exposure by entering into a forward contract. Forward contract locks the rate for a certain period of time. By using this hedging strategy, you know the rate you will be using, which enables you to plan your finances accordingly.
There are a number of other ways to hedge the exchange rate risk. Carry out extensive research and consult with a financial advisor before finding the strategy that is in line with your financial goals.
Getting Mortgage for Properties Abroad
There are different ways to secure a mortgage for overseas properties. For example, you may be able to secure the loan if you make large down payments. Similarly, you can familiarize yourself with the laws of the country related to mortgage or establish a good professional relationship with a foreign lender before moving ahead with this decision.
- Establishing a Good Relationship with Foreign Lender
One way of getting a mortgage for properties abroad is to establish good ties with a foreign lender before applying. There are so many countries, including New Zealand, Australia, and many other nations in Western Europe that offer a mortgage to people who buy a house overseas. But for that, you have to build a good relationship with those lenders before they are willing to make an offer.
By opening a bank account in that bank and maintaining a good standing will definitely come in handy when you apply for a mortgage.
- Making Large Down Payments
You can also secure a mortgage abroad by making large down payment. You may have to pay over 20 percent of the purchase price upfront in the beginning to secure the deal. It can be over 50 percent as well, depending on where you intend to buy a house. Every country has its own laws and regulations. Therefore, you must gather all the information and carefully assess your options before taking a decision.
- Familiarizing Yourself with Local Laws
Familiarizing yourself with the laws of the country is very important to get a clear idea of what you are getting yourself into. It enables you to manage your finances accordingly. What you can do is find a foreign real estate consultant who is expert in transactions related to foreign mortgage. It is even better if a consultant is from a country where the property is located.
Since the regulations of a foreign country will be different from your home country, finding an expert who can walk you through the entire process step by step will definitely be helpful.
There are so many foreign banks who require you to have a life insurance policy before securing a mortgage and add that lender as a beneficiary in case of your death. This is done to make sure the mortgage is paid off in case the person applying for a mortgage dies.
The terms of the life insurance correlate with the terms of the mortgage. For example, if you are 65 years of age and the policy covers you until you are 80, the financial institution would also lend a mortgage with 15 years terms.
Normally, mortgage for buying a house overseas is available at 70 percent loan-to-value ratio with a term period of 30 years. U.S. mortgages don’t have an age restriction, but in some countries, the age limit will be 70 or 75. The mortgage is normally issued on the basis of proof-of-income. Therefore, a borrower has to maintain a reasonable debt to income ratio.
Moreover, maintain all the necessary documentation that will be needed at the time of seeking mortgage approval. For paying a mortgage abroad, you may have to open a bank account in a country where the property is located to make payment in local currency. Some lenders require a mortgage payment of at least 6 months in your account.
For a person who has to make payments for a property in a different country, it can be quite overwhelming to manage the money on a regular basis. Therefore, it is very important to keep all these factors in mind and gather all the necessary information to be able to manage your finances accordingly.
People who have to make international mortgage payments should stay ahead of the minimum payment amounts and interest rates. They should incorporate the transaction fee, legal fee, inspection fee and other related fees in their overall financial plan to be fully prepared. A thorough plan is very crucial for such risky investments as it doesn’t let you bury under the financial burden.