17 March 2021
Those considering purchasing a ski chalet or apartment to enjoy once the pandemic is over will find that the options are a little different post-Brexit.
Miranda John, Director of International Property Finance at SPF Private Clients, explains the options
With the Brexit agreement failing to cover financial services, it has made for a bumpy start to 2021. Lack of clarity means some European banks are no longer lending to British residents buying in Europe, while others remain active. It is a fast-changing landscape. At the time of writing, some countries are granting equivalence back to the UK or offering transition periods to ensure continuation of business. But this is not across the board with France being the notable exception. Some French banks offer mortgages to British residents but the majority do not.
With the Alps there are additional considerations due to the prevalence of new-build developments. Banks have an extra layer of due diligence focused on the developer and builder, penalising the former for administration failures which may not reflect anything untoward with the project itself. The banks also have a quota system to avoid being too exposed to any one development. Résidence de Tourisme or leaseback schemes have been badly hit due to high-profile bankruptcies of the main players so currently there are no lenders who will consider financing non-residents.
On the plus side, interest rates are low and long-term fixed options of 20 to 25 years provide security. Loan-to-values (LTVs) vary but as a general rule, you can borrow a maximum of 50 per cent in Austria and Italy, rising to 70 per cent in Switzerland and 80 per cent in France. Buyers should be aware it may be impossible to raise funds on the property in future so their investment is locked in.
Banks have not changed standard affordability criteria, which is based on net income, but there is caution with bonuses rarely taken into account and certain sectors raising red flags. Most take an average of the past three years income as confirmed by P60s and/or tax returns. All debts are taken into account, including the monthly cost of the new mortgage; as a general rule, these should not exceed 33 per cent of monthly income.
For many buyers, matching the currency of the asset (the property) and the liability (mortgage) offsets some uncertainty, with the full balance of purchase and costs not needed to be converted using today’s exchange rate. With low interest rates, many buyers like having the flexibility to repay the mortgage in future when the fortunes of sterling may have improved. Furthermore, there may be tax benefits as the mortgage will be clearly secured on the property.
In France, the Wealth Tax or Real Estate Wealth Tax (“Impȏt sur la fortune Immobilière” or IFI) is an annual tax payable when the total value of the real estate asset is greater than €1.3m euros, with a sliding scale ranging from 0.5 to 1.5 per cent. A mortgage secured on the property will reduce the net value of the asset and if below this threshold no annual wealth tax will be payable. A loan taken in the UK to buy the property would not gain relief from this tax as the mortgage must be secured on the property itself. British banks can’t take a charge on property overseas so the pool of lenders is far smaller than in the UK.
The private banks
For properties of €3m-plus, there are private banks in Luxembourg, Monaco and Geneva providing attractive terms for prime locations in France, Switzerland and Italy. Private banks do not finance stage payments for new-build projects but will finance once the property has been delivered. High-net-worth individuals don’t often fit the rigid mould of European retail banks’ criteria so are more naturally private banking clients. These banks understand more complex revenue streams and may base lending decisions on assets rather than income. They are also more flexible when it comes to age and will accept a wider range of ownership structures. Private banks typically offer five-year interest-only facilities (bullet loans) but it may be possible to get a longer-term mortgage of up to 15 or 20 years.
Private banks want to develop a relationship with the buyer. This usually means a minimum of €1m being invested with the bank, so this model is really only suitable for property values of €3m-plus. The nature of the asset requirement varies from bank to bank.
It is sensible to check the availability of credit early on so that you can establish your budget – best done before even viewing a property. A decision-in-principle is advisable to strengthen any offer; this is subject to valuation but shows a vendor the finance side has been properly researched.