You have probably heard all the virtues of living and investing overseas many times. And, indeed, there’s an overwhelming case in favor of it.
But there’s a huge gap when comparing buying property abroad with buying property back home: financing. Without the ability to finance, our options for buying abroad are limited. And most people believe financing in a foreign country is out of the question.
But, in fact, you can finance abroad. Today I’m going to discuss five options that may be available to you when buying overseas.
You won’t find all of these options available in every situation, but they’re all worth considering. Let’s take a look at each financing option in turn.
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. The best I’ve seen personally is 75% of value, and the lowest was 50%.
- 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. Therefore 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, 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.
Non-resident bank financing is much harder to find but not impossible. Mexico, Panama, Dominican Republic, Portugal, France, and New Zealand are among the countries where non-residents can get financing.
France may have the best deal out there. I just read a news item this week reporting that non-residents with good credit profiles can access 20-year mortgages at a rate of just 2.25%, an apparent reaction to the European Central Bank dropping their rate to 0%.
One good option here in the Americas is Caye International Bank in Belize. To obtain a loan, you don’t need to be a resident of Belize or a resident of the country you’re buying in. Caye Bank provides financing in their area of operations, which—roughly speaking—is Central America and the northern part of South America.
Most Caye Bank loans require 50% down. Interest rates will vary, but they’re often lower than you can get in banks where the property is located. I recently saw a Belize development that offered 6.9% financing through Caye bank. For more information, you can write to Tricia Villanueva here or see their website here.
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. I saw a HELOC offered by U.S. Bank this morning at 1.9% for an intro period, followed by a fixed 4.24% 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 the old standby mortgage refinancing. This may be best if you’d like to lower your interest rate or change the terms on your first mortgage loan.
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. I don’t think I’ve ever seen a term of more than 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.
I’ve seen some amazing financing offers from developers. Many of them are in locations where there’s no other financing available.
One Brazilian developer, Moura Dubeux, offered brand-new beach units for US$750 down and low payments with no interest for five years. A developer in Mexico offered what he called 5-5-5 financing. That is, US$5000 down, US$500 per month, for five years (with a balloon at the end)… all interest-free.
Developer financing has produced the best finance deals I’ve seen. But remember, these terms are best when the developer is starting to sell. Once the “ice is broken” and the project is selling well, the best financing terms tend to disappear.
Use Your IRA Or 401k
Everyone likes the idea of putting your IRA or Solo-401k to work overseas, and this 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.
Consider All Of Your Options Before Signing On The Dotted Line
There is a world of opportunity abroad… and that opportunity is multiplied many times over if you can get decent financing. Be sure to consider the options for financing when you buy.
Editor, Overseas Property Alert
Good afternoon, Lee,
Thank you for your continued writing. In a recent issue dealing with the beachfront Brazil project Reserva da Praia, Lief Simon wrote, “The play that I am recommending here is to buy and hold for appreciation. In my opinion, it’s the simplest and most straightforward play.”
Just to be certain, are you recommending to simply buy the land and not place a house on it?
Yes, that’s what he’s recommending, although that recommendation is for investors. The reasoning is simple… these are beachfront lots offered at an extremely low price, and most of the upside potential is in the land.
And holding the land is cheap… the property taxes are minimal, and there’s almost no overhead to maintain it.
Once you build, you’ve got a much higher overhead cost and far more investment risk. Construction brings with it 90% of the project risk but only a small increase in profit.
But that’s for investors… if you’re buying because you want a beachfront home on a beautiful beach, then I’d build as soon as you can while the exchange rates can help to reduce the costs of construction.
I read with great interest your article on the corruption index and the rankings of various countries around the globe. Can you comment on why Belize doesn’t even appear on the full list? I realize it’s a small country, but so are some of the others.
I’m curious, since I’ve been interested in Belize for the past few years.
Good question. The Belizean press speculated that Belize was not covered because the government was not cooperating. This is completely untrue.
Transparency International requires three independent data sources in order to include a country in the Corruption Perception Index. When Belize last appeared on the Index in 2008, the sources were: The Economist Intelligence Unit, Information Handling Services Global Insights Report, and the Merchant International Group. Since 2008, two of those sources have stopped covering Belize, so they’ve not been in the Index.
When last in the Index, Belize held position #109 out of 180 countries. Here’s the survey from 2008.
I signed a contract for a property in Colombia at the recent conference. I am considering taking the property in my name so I am eligible for residency. Then, I’d get my wife and daughter residency as dependents.
It is being recommended that I form a civil trust, afterwards, so that my wife and daughter could inherit the property without a lot of cost. Does this sound like a solid plan based on what you know about how things work there?
My concern of owning in my name is liability. Should this be a major concern for me or am I just thinking the way we all think here in the States?
I don’t think that’s a good idea. That is, buying in your name for the visa then switching it to a trust.
The problem with changing the title over to a trust would come when it’s time to renew the visa. This would occur once every year, or five years, depending on the visa. The property would need to be in your personal name to show that you are still eligible.
Also, I would not make a decision on how to title the property based on liability. Unlike the States and Canada, Colombia is a civil-law country. As such, they don’t have the legal structure for personal-injury law or personal-injury lawyers. (It’s one of the positives of living there.)
So if someone trips on your sidewalk and hurts themselves, they’re just clumsy… not a plaintiff.
And the issue of succession may not be worth worrying about, in this particular case. When one owner of a jointly owned property dies, their share would pass to their children leaving the property in the name of the surviving spouse and their daughter in Jerry’s case. When the second person dies, their share goes to the daughter as well. This happens even if there is no will with little cost. If this is the desired outcome, I couldn’t justify the cost of setting up the trust and its annual fees… at least not for succession purposes alone.
Where succession becomes an issue (and a trust is easily justified) is when two people have children from different marriages. In this scenario, the surviving spouse would be co-owner with some number of stepchildren. To avoid this situation, speak to a local attorney.
Have a question? You can write to Lee here.