How can you fund the purchase of your second home or investment property in a foreign country?
First, you need to figure how much capital you have available to invest. If you don’t know this number already, take time right now to do the math. (Sorry, you’re on your own for this bit.)
Second, you should look at the kind of financing or purchase terms that might be available to you.
The bad news is, in much of the rest of the world, it’s not possible for a foreigner to borrow money locally to buy real estate. No bank will lend to you…
And, in places where it is possible for a foreigner to get a mortgage, you won’t find the terms as user-friendly as they tend to be in the United States.
The good news is, you do have options. Today I’m going to walk you through the top five options to look for in overseas markets.
You won’t find all of these options available in every situation, but they’re all worth considering…
1. Bank Financing
This one is hardest to find worldwide, but it’s often the best option where it’s available.
Here are four things to keep in mind:
- Generally speaking, loan-to-value ratios will be lower than you’re used to. These days, it’s typically 50% to 70% at best.
- Terms will be shorter, with 30-year loans fairly unheard of.
- Interest rates will normally be floating rather than fixed.
- Some lenders require life insurance to guarantee your loan. This can limit the term of your loan if you’re older, since many insurance companies will only insure you through age 75. So, the best a 60-year-old could expect might be a 15-year loan where insurance is required.
Bank financing for expats falls into two general categories: financing for residents (in the country where the bank operates) or for non-residents.
For Residents
For residents, most countries will treat the applicant like a citizen. But a word of caution is in order here. Just like local citizens, you’ll usually need to prove income when applying to local banks… same as you would with a U.S. or Canadian bank. The type of income they accept will vary, and it’s something you’ll need to discuss with the bank.
For Non-resident
Non-resident bank financing is much harder to find but not impossible. Mexico, Panama, Dominican Republic, Portugal, France, and Italy are among the countries where non-residents can get financing.
France is one of the most attractive havens when it comes to bank financing. Right now, as a foreign buyer in this country, you can get as much as 80% LTV, up to a maximum term of 25 years, with interest rates as low as 1.2%.
2. Borrowing On Your Home Equity
One of the easiest and simplest ways to borrow for an overseas property is to take out a home equity line of credit (HELOC) on your North American property. This offers a couple of advantages:
One is that the interest rate you pay for a HELOC will be lower than you’ll get in most foreign countries. Bank of America, for example, is currently offering a rate of 2.49% for an intro period, followed by a fixed 4.7% rate for the life of the loan.
Also—from the perspective of the overseas seller—the HELOC makes you a cash buyer. So you can take advantage of any cash discounts offered and be in a better position for negotiation.
A HELOC is a line of credit. You don’t have to use it all if you don’t need it… and you don’t have to borrow it all at once. This works well if you’re making, for example, progress payments on a pre-construction purchase. You don’t have to pay interest until you actually use the money.
A traditional second-mortgage loan may also work for you, if you know how much money you need, and if you need most of it at the same time. It has all of the other advantages of a HELOC.
And don’t forget mortgage refinancing. This may be best if you’d like to lower your interest rate or change the terms on your first mortgage loan.
3. Seller Financing
When buying from a private owner, some sellers are willing to finance some of the purchase price. The terms will be whatever you agree on, but it’s typically a maximum five years.
Generally speaking, the longer the property has been for sale, the better terms you’ll be able to negotiate.
Just like a mortgage, don’t expect the seller to deliver the deed until you’re finished paying.
4. Developer Financing
Over the past few years, we’ve seen some attractive financing deals emerge from developers—sometimes with zero interest. Many of these financing packages are in locations where there’s no other financing available.
These terms are best when the developer is starting to sell—and usually apply to pre-construction deals. Once the “ice is broken” and the project is selling well, the best financing terms tend to disappear.
5. Use Your IRA Or 401k
Putting your IRA or Solo-401k to work overseas is one of the best ways to invest since your income and capital gains are tax-deferred.
One easy tactic is to borrow from your Solo-401k. The IRS limits the loan to US$50,000, but, if that’s enough, it’s the best way to borrow… since you’re paying the interest to yourself. If you take a loan from your 401k, what you buy can be used personally… the normal IRA/401k restrictions do not apply to loans or properties you buy with loans.
If you have an IRA (IRAs do not allow borrowing), or US$50k is not enough, you can simply purchase the property with your retirement plan. In this case, you can’t use the property personally, but you do get the tax advantages.
Lynn Mulvihill
Editor, Overseas Property Alert
