Financing your second home abroad

Some years after a pandemic that radically changed remote working habits and highlighted the importance of home comforts, there are now many people who plan to buy a second residence abroad. But whatever your reason might be, you’re probably going to rely on a sound partner to be able to finance your property. When it comes to buying real estate abroad, you can’t wing it. You need specialist expertise in various fields.

There are as many reasons for buying a second home abroad as there are types of property sought by affluent clients. Some dream of getting away from it all for long winter weekends in a chic mountain chalet, whilst others seek a seaside property where they can spend their retirement, or a pied-à-terre in a capital city they frequently travel to on business. Apart from personal enjoyment of the property, buying a second home abroad can also be a strategy to diversify assets or a way to generate rental income. Before buying a second home, it’s important to get a clear understanding of the terms of purchase and ownership of this property. These two aspects could have a major impact on the income you can expect from this investment. Owning real estate directly or via a dedicated legal structure could possibly offer certain advantages.

Every country has its own rules and specific tax system.

Besides their reasons for buying, everyone has their own particular financial situation and their own way of fitting such a purchase into their life goals. Every country has its own rules and specific tax system. Buying real estate abroad is very often a process quite different from what you’re used to when you buy a property at home. Depending on the country, it is possible that you will have less legal protection for your purchase than you have in Luxembourg. For all these reasons, not only is it essential that you have a complete overview of your legal and financial situation before you take the plunge, but you must also call on partners who can avoid the potential pitfalls and meet all the challenges that are bound to crop up along the way.

Financing a second home abroad

Between making the plan and bringing it to fruition, one of the biggest obstacles most buyers encounter is the financing of the property. And it’s not an obstacle that’s always easy to overcome. There are a number of options available to you.

Paying cash for the property

The question of financing can be solved easily if you have the funds to buy your second home with cash. Not only will this place you in a strong negotiating position, it also gives you the advantage of not having to pay interest on a loan. But be sure to do your sums right. You must hold enough cash in reserve to cover all the incidental expenses related to the purchase (any fund transfer charges, legal and tax charges, notary and transfer fees, etc.), the ownership (alterations and renovations, furnishings, insurance, property taxes etc.), and the maintenance of the property.

You also need to be sure that tying up a large part of your cash in real estate abroad won’t be detrimental to the management of your assets as a whole. Or to put it another way, just because you’re able to pay cash doesn’t necessarily make it the best option. International loans can be used to reduce your tax base in the same way as other categories of deductible debt. Whether the purchase is made with 100% of your own funds or through financing, we recommend that you always consult independent experts in finance and law before contemplating such a transaction.

Taking out a real estate loan from a local financial institution

A local bank will probably have a better knowledge of the local real estate market and may possibly be able to identify other properties that meet your criteria. What’s more, the loan will be made in the local currency – which is generally preferable in order to avoid concerns about exchange rate fluctuations, if relevant.

Local banks often only make loans to residents and are unwilling to lend large amounts to new clients.

However, be aware that local banks often only make loans to residents and are unwilling to lend large amounts to new clients with whom they do not have a long-standing relationship of trust. And even if it does prove possible to obtain a loan, it may be granted at a much higher interest rate than you’d be offered if you were a resident of that country. Lastly, the bank could ask you to take out a life insurance policy (with itself as beneficiary) as well as make a personal contribution that could amount to well over 30% of your coveted property’s value.

One solution here would be to turn to the local subsidiary of your own bank, assuming it has a presence in that country. If applicable, the most reasonable thing to do would be to approach your usual advisers in your country of residence and leave them to handle discussions with their local colleagues, so as to obtain more attractive terms that reflect your financial situation.

Taking out a real estate loan from your local bank

Your bank won’t always offer financing on assets abroad. When it does so, this is generally restricted to certain specific countries where it has subsidiaries or expert partners capable of handling arrangements locally and ensuring that the purchase takes place in accordance with the laws and tax system of the country where the property is located.

Dealing with your usual bank means there’s no language barrier and – since the bank is familiar with your financial situation and assets – in theory your application will be processed more quickly. Depending on the bank, you may be expected to hold some of your financial assets with this local bank to partially cover your loan for the acquisition of the foreign property. The local bank will take care of the mortgage registration and ensure the guarantees are in place.

Before you sign, always make sure that you have fully reviewed and clarified with your bank the various legal and tax aspects of your project, as well as considerations such as exchange rate variations, your exit plan should you one day wish to sell, the question of insurance, etc.

Stages of the financing

In addition to the actual financing, the acquisition of foreign real estate ideally calls on an experienced multidisciplinary team that includes specialists in loan structuring, wealth planning, law, credit analysis, taxation and real estate.

The first stage involves building a clear picture of your needs and objectives in light of your financial situation and overall wealth planning.

For your bank, the first stage involves building a clear picture of your needs and objectives in light of your financial situation and overall wealth planning. Based on this, particular attention will be paid to examining the intended property: its characteristics, age, location, condition and any renovations that may be necessary. If a mortgage is taken out in favour of the lender, the latter may appoint an independent local valuer to assess the value of the property in order to determine the loan-to-value to be applied. The financing of a second home could also be guaranteed exclusively by a pledge on the securities portfolio with the lender, or even a combination of a mortgage and a pledge, depending on the customer’s financial capacity and availability.

Once this information has been obtained, it will be possible to determine not only the financing requirement – taking into account your financial profile – but also whether it is well and truly in line with your personal and professional goals. It’s important to know what you want to get out of it, and why, in order to produce a tailor-made financing solution. The deeper the bank’s understanding, the better the end result. Trust and transparency play an essential role in the discussions.

Once this overview has been carried out, your financing request will go through the bank’s extensive in-house validation process. This is based on an analysis of your ability to service the debt depending on your assets, the risks, an assessment of your capital base, the criteria laid down by the regulator, as well as the credit criteria established by the bank itself. How complicated this process is depends on the complexity of the request. There’s a difference between, let’s say, a resident of Luxembourg who wants to buy a second home in Nice and an American who is resident in Luxembourg but wishes to buy a property in Spain via his Asia-based company. In any event, if the request is granted you will receive an offer. If this is agreed, on-site visits will be made to the property (with the help of local experts if need be) and the definitive offer drawn up. This will also provide an outline of the support offered by the bank in completing all the arrangements relating to the acquisition of the property.

Not only do in-house validation processes and the scope of support vary from bank to bank, so too do the types of loan offered. Depending on which institution you go to, the maximum term of the loan can differ considerably. Some banks set the ceiling for the repayment of a term loan at 5 years, while others will allow up to 20 years for a conventional capital-and-interest repayment loan. You should also be aware that not all financial institutions are willing to finance 100% of the property; in addition, most are reluctant to finance off-plan purchases.

International loans are the preserve of affluent clients.

All banks set conditions and upper limits on the amounts you can borrow. For example, to qualify for a loan you must hold a proportion of your assets with that bank (either in cash or an investment portfolio). Depending on the bank, we’re talking about assets with a value that could be well over one million euros –meaning international loans are clearly the preserve of affluent clients.

How long will it take?

What’s the typical timeline between first contacting your bank and receiving the keys to your second home abroad? It all depends on your bank’s expertise in the target country, its ability to get things moving locally, its knowledge of the documents that need to be completed and having the right people to call if there are administrative or any other problems. More than anything, it’s this measure of control that determines the ease and speed of the financing process. Typically, if you’re a client with whom the bank is already working, whose situation it is familiar with, and you have a clear-cut project in a country of which it has a good knowledge, it’s not unusual to obtain your loan within three months. It’s always possible that things will go much faster – nor is it impossible that it could be slower. In short, this three-month timeframe doesn’t mean much, as each project is unique.