A Short Note on Financing

This week, I thought I’d write a little more about financing, as I feel strongly that agents and developers should be doing much more to ensure their clients understand how it works and how it will affect their investments.

I can’t emphasise how important it is to research how much finance you are likely to receive before putting down a non-refundable deposit on a property - and you won’t find many estate agents or developers who will write that to you in an email. Someplace Else has relationships with English speaking brokers and/or banks in all the countries we deal with that offer financing to foreigners, and one of our key aims in 2008 is to continue to strengthen these relationships, thereby ensuring that our clients always have quick access the best possible financial advice.

Firstly, the lending criteria for obtaining foreign mortgages is usually quite similar to what you are used to at home. Generally speaking, you must be over 21 years old, be in secure employment, prove that you have an ability to comfortably repay, have a good credit history and aged not greater than 70 at the end of the mortgage term.

We all know that most banks do their utmost to make their lending policies and how they make money out of loans them as complex and arcane as possible. With this in mind I thought some may find be useful to have the following clarified:

Nominal vs Real Interest Rates
The nominal interest rate is merely the interest rate before it is adjusted for inflation. After this adjustment, it is called the real interest rate. This helps a country measure its price and cost competitiveness compared to others.

Fixed vs Variable Interest Rates
Generally speaking, banks based in emerging markets offer variable interest repayment mortgages to locals and foreigners, although they are constantly improving and expanding their product range as they are operating in countries with tiny amounts of personal debt. By variable interest rate I mean that the rate can go up or down and is linked to the central bank controlling the country you are borrowing from. By repayment mortgage I mean that your monthly payments cover both the interest charged and the original amount borrowed.

Mortgages.ie have a very handy calculator for repayment mortgages that allows stress test for an additional 3% if interest rates go up. Click here to find out more.

Loan To Value
I think sometimes people get too focused on LTV. It is merely the percentage of money you want to borrow compared to the cost of the property. Many banks lend a percentage of what their valuation of the property is on completion, not the amount you bought it for offplan. This is great if the price of your property goes up during the construction period, and very bad if it goes down (as some unfortunate people in Dublin are now discovering).

In Conclusion
Financing, or leveraging as it is sometimes called, is and always will be an incredibly efficient way of maximising the return on your investment. As discussed in a previous newsletter most emerging markets are nowhere near as exposed to the global credit crunch as Ireland and UK. The good news for investors is that these foreign banks are expanding access to finance just as our own are making it more difficult. And thank goodness for that.

Kind Regards

Colin.