Funding your overseas investment properties.
There are varying ways that an investor may fund the purchase off plan investment property and in this section OPAC will explain the most common methods our clients make use of.
The first important fact that a potential investor must be aware of is that is is not possible to obtain a mortgage secured upon the option you receive when you reserve an off plan property.
The simplest and most obvious reason for this is that as the property has not actually been constructed yet there is no Legal Title registered with the relevant Land Registry and as a mortgage is a loan secured upon the title of a property it is therefore not possible to borrow in this manner.
The investor must therefore look at raising mortgage finance on an existing property they own, if the property owned is “unencumbered” i.e. has no legal mortgage borrowings against it at the moment they can release some of the equity i.e. the difference between any existing mortgage and the current valuation of the property.
This is very similar to when an investor owns a property that has an existing mortgage and this is obviously a far more common scenario than owning without a mortgage they can go to another lender and “Remortgage”. This where Lender X takes over the mortgage from existing Lender Y and at the same time the borrower can request an increase in the mortgage amount subject to there being enough Equity in the property.
When relating borrowings to buying property the term often used is “Gearing” or “Leverage”, the website www.Dictionary.com describes Gearing or Leverage as “the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss”.
There are many reasons as to why Gearing as we shall call it is extremely advantageous to the property investor.
- Gearing means that you can invest in off plan property opportunities without actually having the liquid cash or savings yourself.
- Gearing means that you can invest in more investment opportunities than if you were having to use savings yourself.
- It is far more comfortable to fund out of cash flow the monthly repayments on a mortgage of say 400€ per month than it is to fund the entire purchase yourself.
- In some countries there are tax advantages to having a mortgage.
- If you invest in multiple investment properties and run it as a business you can potentially offset interest payments against rentals incomes or capital gains.
- Interest rates and mortgage arrangement fees can vary massively in differing countries and it may be advantageous to use this to your advantage.
The expression “a property is highly geared” means that compared to its current valuation there is a high percentage of borrowings secured upon it, so as an example a property with a valuation of 200,000€ with a mortgage of 85% Loan to Value (LTV) or 170,000€ would be Highly Geared and the same value property with a mortgage of 30% LTV or 60,000€ would be considered to be Low Geared.
The advantage that OPAC investors use most is the ability to invest in more than one property at a time to take maximum benefit from the expected Capital Growth in a given market.
Here’s an example:
- Purchase price of an off plan property is 100,000€
- Deposit required before completion 30% or 30,000€
- An Interest Only mortgage secured against an existing property assuming 5% per annum interest would cost 1500€ per annum or 125€ per month.
- The off plan investment achieves growth of 25% during the construction and is sold on before completion in line with the Investors short term strategy.
- If purchasing one property the gain would be 25,000€, with mortgage costs of 3000€ if the mortgage had been held for two years, plus any setup fees.
- If two properties had been purchase then the mortgage cost would obviously be double at 6000€ but very importantly so would the gain at 50,000€.
It is therefore clear to see why Gearing can be so profitable for the property investor.
The disadvantages to Gearing are that the Investor must have the ability to fund the monthly loan repayments and that proof of ability to pay the mortgages may restrict the amount you can borrow.
OPAC work closely with many highly experienced Independent Financial Advisors (IFA’s) and Mortgage Brokers who have access to literally thousands of funding options from all of the leading Banks and Financial Institutions in many different countries so please let us know if you would like us to introduce to an expert in this field who can advise you accordingly.
Alternative funding methods that an off plan property investor may use are obviously cash which is extremely straightforward but for many investors severely limits the amount or number of investments they can make.
Pension schemes such as Self Invested Pensions (Sip’s) where the policy holder makes their own investment decisions may be utilised but this is an area that requires extremely careful planning and OPAC would recommend that any investor interested in this method of funding seeks appropriate specialist financial advice on the options available. Again OPAC can recommend specialist pension consultants if required.