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Foreign Property Mortgages - 8 things to consider

As the foreign property market continues to mature, here are eight important things to consider for a mortgage. Obtaining a mortgage on any foreign property allows you to buy a property more expensive than you might otherwise be able to afford and maximises your investment return by allowing you to use the bank's money rather than your own. However, there are several things you must consider when wishing to use a mortgage to buy property in Bulgaria.

Initial Advice- Make sure you take advice from professional mortgage advisors. Mortgage advice is often offered by the estate agent; feel free to listen to this but make sure you check the advice with the experts.

It may be tempting for property advisors to over simplify the mortgage process due to the over-riding urge to sell a property, rather than really understanding mortgages.

On numerous occasions we have witnessed property agents tell clients that mortgages are "no problem", they can get "90% of the value" and they can "have several mortgages - easy". These flippant comments can cause clients to commit to several properties only later to find that they cannot quality for a Bulgarian mortgage or that the mortgages they were told about do not exist!

Preliminary Contract - A majority of preliminary contracts in Bulgaria are more suitable for clients buying in cash rather than those using a mortgage. We would suggest that if you want to use a mortgage, insist on a few additional clauses being added into the preliminary contract which can serve to protect both the buyer and the vendor. In order to complete a mortgage a whole raft of documents needs to be obtained from the vendor. If the vendor fails to provide these documents it is impossible to obtain a mortgage, yet the terms of your preliminary contract may still be compulsory, say, with regards to payments and penalties. Use of additional clauses would protect you from this. Bulgarian Home Loans, expert mortgage advisors for Bulgarian property purchases, have an annexe which contains all the necessary additional clauses that they provide to their clients.

Staged Payments - The preliminary contract will contain details of when the staged payments are needed (particularly in relation to off-plan properties). It is important that these staged payments match how the potential lender can fund your purchase. For instance, some lenders (Piraeus Bank) only release the mortgage once Act 16 (Habitation Certificate) is obtained, yet the vendor may be insisting on full payment at Act 15 (Completion of Build).

Another possibility is that the preliminary contract may state that your staged payment is needed when your property reaches roof level. This is fairly common, yet the mortgage application cannot usually be submitted until it is accompanied by Act 14 (Roof Level Certification). This certificate may not be obtained by the developer until a few weeks after the property has actually physically reached roof level. Make sure your contractual payment is due a few weeks after the certificate is obtained rather than when the physical build stage at this level is achieved.

Price shown on Notary Deed - It is common place for agents to tell you that the notary deed price is often lower than the actual purchase price you are paying. Although this has been a common practice it is not legal. Under-declaring the actual price was usually used to reduce the initial tax burden on both parties. However, the tax reduction is insignificant and this practice also causes the buyer large tax bills when coming to resell the property. A vast majority of lenders will only release the mortgage as a percentage of the purchase price or the notary deed price - whichever is the lower!

As an example, if you were purchasing a foreign property for 100,000 euros and expecting a 70% mortgage of 70,000 euros, if the notary deed price is put down as only 50,000 eurs, then you will only end up with a mortgage of 70% of the 50,000 marked in the deeds, which is only 35,000 euros.

Valuation Shortfalls - Be prepared for the lender to value the property for less than the price you are paying. This does not reflect the actual market price of the property but more reflects the Bulgarian lenders attitude to risk and their thoughts as to what the price of the property would be if they had to sell it in a rush as a repossessed property. Chris Downham, Managing Director of Bulgarian Home Loans, reports that "in about 50% of cases we find that the banks reduce the value of the foreign property and hence the corresponding loan amount which leaves buyers with a shortfall that they need to pay by cash. We can help raise this in the UK via loans, etc., but we would suggest that clients do not commit all their available cash as a deposit, otherwise they may find themselves short of money at completion."

Bank Accounts - Bulgarian banks will not send the mortgage sums to foreign bank accounts and they will only release funds to a Bulgarian bank account. You need to make sure that your preliminary contract is asking for the funds to be sent to your Bulgarian bank account.

Paying your Mortgage - Unfortunately, the loan being released by the Bulgarian bank is not the end of the process; it is merely the start. You need to pay your mortgage repayment every month.

Do not expect a Bulgarian lender to be understanding if you miss payments by a couple of days - you will be hit by large financial penalties if any of your payment dates are missed.

A lot of Bulgarian banks will not send you bank statements and do not offer intternet banking in English. Again, the services of a mortgage advisor will assist you with this but even so, it is your responsibility to regularly send money to your Bulgarian bank account to repay your mortgage. A regular payment plan through a currency broker is advisable.

Be careful if you are relying on rental income to pay your mortgage; if you do not achieve the expected rental income then you may not be able to pay your mortgage.

Timescales - Finally, a typical mortgage process for foreigners buying in Bulgaria lasts in excess of three months (although timescales are decreasing). Make sure yo leave yourself enough time. Do not wait to enquire about a mortgage when the vendor requests funds as it will be too late.

The above process might sound painful but it need not be. The first thing is to make it clear to the developer/vendor before signing a contract or parting with any money that you will be using a mortgage. Then consult an expert mortgage advisor such as Bulgarian Home Loans prior to making any commitments, to check that you can actually obtain a mortgage.

The fact is that foreign property investment with a mortgage is a far better investment than purchasing in cash but you must be fully aware of the process.