Advantages of using a mortgage from a British lender to pay for an overseas property

When we decided to buy a house on the Spanish island of Ibiza we were confronted with the same choice as many expatriates. We could either sell our UK property or raise a mortgage on our flat in Edinburgh and rely on rental income to cover the resulting monthly payments.

 Being something of a bridge burner, my inclination was to sell-up and move on. In an ideal world that would have meant downsizing to the point where we’d have a place in Spain with no mortgage and a few euros in the bank. Actually, it wouldn’t have worked out like that anyway as we ended up buying a small villa with a swimming pool which cost rather more than our Edinburgh flat. But that’s another story.

Cost wasn’t the deciding factor. It was more to do with Barbara wanting to retain a place close to her family should things go wrong in Spain. From an economic point of view there’s also the argument that having properties in two countries spreads some of the risk. As in Britain, property prices in the Balearic Islands have risen astronomically over the last few years as they have in the whole of Spain. In both countries the increases have always threatened to end in a crash.

Hopefully, having two homes will halve the risk of being caught by the bursting of a national property bubble. Of course, it won’t actually cut the risk by as much as that because many of the same international factors affect both property markets. And, because so many people from England, Scotland, Wales and Ireland have bought holiday homes in Spain, a crash in any of those is bound to have an impact as people rush to sell off their second homes. That said, there are probably as many Germans as any other non-Spanish nationality with properties on Ibiza and the market has survived the dire state of their domestic economy over the last few years.

Another reason for using money raised from a British building society, bank or other financial institution is ease. Dealing with an organisation in English is much more straightforward than in a foreign language, especially as banks can be scarey institutions at the best of times. Also, if you're giving up a steady job to emigrate it's much simpler to raise finance if you've got a fistful of recent payslips to show.

As well as simplicity, there’s another investment reason why it may be worth mortgaging your UK property rather than selling it. I’ll keep the numbers simple for the sake of illustration. Say you have a property in the UK that’s worth £100,000. You take out a mortgage of 80% giving you £80,000 to spend on your home in the sun and £20,000 invested in the UK. If the value of your UK home increases by 5% that makes the property worth £105,000 and your British investment has risen to £25,000. That’s a nice 25% increase on your investment.

Of course, nothing is as straightforward as this. First of all, the figures rely on you being able to cover the mortgage payments with rental income. Then, there’s the tax man. First, you’ll have to pay income tax on the money you receive as rent, although you can offset your mortgage payments against that. Then, you’ll be liable for capital gains tax (CGT) if and when you come to sell the property as it is no longer your principal residence.

It’s not entirely bleak as there are all sorts of allowances that an accountant with knowledge of owning property overseas can help you with. It’s just worth knowing before you take any irrevocable steps that there may be pitfalls in owning properties in two countries. As ever, if you’ve experience as a property owner, an expert financial adviser or are thinking of making the move, it would be great to hear your comments. This is undoubtedly an area that will be covered in my forthcoming book on living and working abroad to be published by A&C Black, probably in 2007

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