In the first of a regular series of legal articles, Peter Esders looks at the problems that can be caused by mortgages
Not many people are in the fortunate position to buy a second property without some sort of finance and as such often end up with a mortgage to help fund the purchase of their property abroad. People are comfortable with the concept of mortgages when it comes to buying property and understand how they work. However, one thing that most people do not fully always understand is the impact of an international element on mortgages.
As soon as you start adding other jurisdictions and currencies into the mix there are things that you need to consider which you do not when mortgaging in your own home country. Many people fail to fully consider the implications associated with this.
The amount outstanding
Let us say that you are buying a property in Cyprus but live and work in the UK. Your income is in Sterling but the value of the property is in Euros. Mortgaging the property in Cyprus means that the amount outstanding on the mortgage is in the same currency as the value of property and therefore meaning that these two things are less likely to get out of kilter unless the value of the property dramatically drops.
On the other hand if you remortgage your UK property to release equity to buy the property in Cyprus then at least the amount that you owe will be static against your ‘home’ currency even if the value of the property can vary depending on the exchange rate.
I have had clients who have made money when they sold a property only to end up with a loss after they have converted the property back into their own home currency. Similarly I have had clients who have returned a profit despite selling the property for less than they bought it for as the exchange rate has worked in their favour.
Add into the equation interest rates varying between countries and the fact that, to quote the famous warning: “The value of properties can go down as well as up,” and you can see that if you get the decision wrong you can easily end up in all sorts of trouble. There is a lot more to consider than there is with a simple UK mortgage on a UK property.
Over the years Cypriot Banks have encouraged foreign buyers to take out loans in Japanese Yen and then Swiss Francs when buying a property in Cyprus. The thinking at the time was that the cost of these loans was cheap compared to Cypriot loans.
Unfortunately the banks (and in most instances the lawyers acting for the client) didn’t bring to the attention of the majority of clients that there was huge potential for these loans to work against the clients and people trusted the advice being given to them – and so it has proved over time. We now regularly speak to people who owe almost double the amount that they borrowed because of the way that these loans have worked and the changes in exchange and interest rates.
The message when taking out funding for a property purchase is clear – there is not necessarily a problem taking out a mortgage to help you buy a property abroad (assuming that the banks are lending) but if you are going to do this, do things properly.
Make sure that you use a good mortgage broker to talk to you about all the options and implications of the loan. Make sure that you have a good currency dealer to manage the exchange rates as much as possible. Keep things simple – after all why introduce a third country and exchange rate if this is not needed.
Independent legal advice
And most importantly seek independent legal advice and do not rely upon the lawyers provided to you by the selling agent, developer or lending bank.
If you have been caught out by Swiss Franc mortgages in Cyprus in the past there may be things that you can do about this but it is important to speak to an independent lawyer about this before attempting to address the issues or negotiate with the bank yourself.
For more detailed information concerning the points raised in this area please follow the link below.