The starting point for this comparison is usually a customer's desire to purchase a property outside their country of residence, usually in another European country. Here, you are often faced with the decision of whether to take out a local mortgage for this purchase or to opt for an equity release on properties in your home country if you already have unencumbered property assets there. Both options have their pros and cons. In this article, we break down the key points for buyers between mortgages in the country of purchase and equity release in the home country.
Financing European Real Estate
When financing properties abroad there are a few hurdles that a buyer has to overcome. European property markets can be an attractive destination for property investments, but they also have their own financing rules, banking regulations and possibly also different currencies. Expatriate buyers are often faced with the decision of whether to take out a local mortgage in the country of the property, or whether an equity release from their home country over existing properties is an alternative to pay the purchase price abroad. This decision is influenced by many factors, including the terms available, one's own risk appetite and the amount of a property purchase that a foreign buyer can finance. It is important to consider all these factors to ensure that the chosen financing structure fits your long-term goals. In countries such as Germany, Switzerland and Austria, strict solvency evaluations may be associated with local financing, and these markets are also characterised by a high degree of stability and regulation. In countries such as Spain and France, foreigners can access a range of financing options, albeit with very different conditions. Aside from local financing options as a non-resident, buyers often also have the option of raising capital on an unencumbered domestic property in Germany or their respective home country, which can mean a simpler documentation process for the customer. The equity release process involves valuing the home and assessing how much additional capital can be made available for new purchases. European and domestic property mortgages for overseas property purchases each have their own advantages and disadvantages.
Foreign Mortgages
Foreign mortgages are taken out in the European country in which the property is to be purchased. These loans are subject to the banking regulations of the respective country as well as local laws and requirements. For example, Spanish mortgages for foreigners can be attractive because the country is relatively open to financing for non-residents. With foreign mortgages, you are operating within the country-specific banking system, which provides access to the local banking network and where it may make sense to consider other services related to the home, such as local accounts or lower transaction costs. At the same time, the loan application process for foreign mortgages can be more complex and usually requires a good knowledge of local property laws and banking regulations. In some countries, stricter conditions apply to financing for expatriate buyers, such as the requirement to provide a local guarantor or to submit further documents regarding income, equity and financial situation.
Equity release Via a Domestic Property
Equity release means that you raise additional capital by mortgaging an existing property in Germany or in your home country. A bank in Germany secures a property and grants you a loan that you can use to purchase a property abroad. This can be attractive to buyers who want flexibility and to minimise the hassle of borrowing. One of the biggest advantages of equity release is that it can bypass the often complex and strict requirements for taking out foreign mortgages. This can be a faster and less complicated option than dealing with the foreign banking system and regulatory framework, and is therefore ideal for buyers who need financing more quickly and have a free land charge on an existing real estate portfolio in their home country. In addition, buyers can benefit from potentially better conditions through domestic equity release.
A Comparison of Costs and Risks
To decide whether financing abroad or in your home country is the better option, you need to compare the respective costs and risks of a foreign mortgage with those of an equity release. The costs of a foreign mortgage include notary fees, valuation fees and other local bank fees. These are also available with equity release, but they can be lower if a long-term portfolio is managed by your house bank.
On the other hand, a buyer may not want to establish too many chains between real estate assets in Germany and abroad, especially when it comes to larger and thus more complex portfolios that regularly require refinancing or re-valuation. In such a case, the choice of foreign financing via the domestic variant would be preferred.
Another factor to consider is exchange rates. For example, in the case of foreign mortgages, incoming rental payments have the same currency as a local loan, so exchange rate fluctuations are usually small. If equity release is arranged in the home country currency, but rental income is received in a foreign currency, the buyer could be exposed to currency fluctuations. Ultimately, deciding between the two options is a very personal matter and depends on the preferences and dependencies of the assets of the respective buyer.
Further information and expert advice can be found on our pages about International Mortgages including Swiss Mortgages, Italian Mortgages, German Mortgages und der Spanish Mortgages.
