As a result of increased interest in purchasing overseas residential property, there is now an array of facilities on offer. Options are also becoming increasingly complex. Here are some pointers designed to help you negotiate the maze

Understanding the interest rate

If the interest rate on a loan seems too good to be true, then it probably is.

Interest on an outstanding loan can be calculated on a monthly, quarterly, half-yearly or even annual basis. The method of calculation will substantially affect the real costs you incur in borrowing the money.

Thus, an advertised rate of 7 per cent per year could in fact come to more than 8 per cent in real terms.

One way to tackle this problem is simply to check what the actual repayment figure would be over a given term, say, one year, since this is what really matters.

To fix or not to fix

It is tempting to opt for a fixed rate, which provides a degree of certainty and might be lower than prevailing variable rates.

There is no doubt that fixed-rate borrowers can outsmart the market, but there have been many occasions when variable repayments would have brought dividends.

Mortgage lenders offer fixed rates for one reason - to buy your loyalty. The rate is usually fixed for a relatively short period in relation to the life of the loan, so you should ensure that the lender will offer a competitive variable-rate mortgage when the time comes.

Many people in Asia would probably benefit from flexible loan arrangements that could accommodate any future changes in personal circumstances.

However, you should check if there are penalties imposed for early repayment. You should also be wary of other conditions such as the compulsory purchase of various forms of insurance.

UK withholding tax

When you borrow from certain lenders in order to finance British property purchases, the interest payable on your loan could be subject to a UK withholding tax.

To play it safe, ask for written confirmation that this will not have an impact on your loan.

Other costs to look out for

Most lenders charge an arrangement fee - also known as an application, establishment or processing fee - which is either a flat fee or a percentage of the advance.

Some mortgage brokers charge a fee for sourcing a suitable loan facility. Check to see if any of the fees will be upfront charges or whether they will be levied only at a later stage, for example, upon your formal acceptance of the loan offer letter.

Remember that legal fees (both your own and those incurred by the lender) would probably be for your account, as would valuation fees.

Watch out for interest rate loadings, which are occasionally levied by institutions lending on overseas-based borrowers and in the case of properties that will be rented out rather than owner-occupied.

An additional cost might take the form of life insurance to cover the loan amount.

Some lenders also seek to tie borrowers into building or content insurance. While all these forms of cover might be highly desirable and indeed might be compulsory, there are numerous types available with widely differing premiums.

Always get a written quotation.

In some cases, other surprises in the form of periodic administration fees might be encountered.

Be aware of other miscellaneous fees and charges related to the following:

- Revaluation fees when there is an application for an additional loan;

- Deed handling, inspection or safe keeping;

- Conversion of repayment method;

- Consideration of letting/letting penalty;

- Approval of building insurance (if not arranged by the lender);

- Duplicate statements, breakdowns of transactions and so on.

Ask the lender to indicate all charges and penalties at the outset so as to avoid nasty surprises later.

Top-ups

Check whether the lender would normally require you to top up the security for the loan if there is a movement in relative exchange rates or a drop in the property's value.

Currency considerations

One important issue is the currency that your loan is taken out in.

Some borrowers are unsure about where they and their families will be located in a few years' time, about where their principal source of income will be generated, and hence about which currency that income will be denominated in.

Most are trying to avoid the "financial handcuffs" that accompany a typical retail loan arrangement and to seek more imaginative packages that afford greater currency flexibility.

Instead of being locked into one particular currency during the whole repayment period, a borrower can seek a currency switching option.

This would give him the facility to finance in one currency today while retaining the option to convert into another currency at a later date.  

For example, a borrower could choose to finance in British pounds originally, and later switch to US dollars should movements in cross-rates provide an opportunity to minimise costs or should his principal source of income change.

Generally speaking, it is wise to match the currency of your assets with that of your liabilities, for example, a British property and a sterling loan.

Many people, however, opt to match more liquid assets such as savings, salary, future provident fund proceeds or even other existing assets, with the loan.

In this case, the British property might be matched with a US dollar loan serviced by a US dollar salary, for example.

Loan processing

Some banks offer overseas mortgage facilities that are made available in Asia, other banks in Asia act as "post offices" for their parent operations overseas and, of course, many banks based overseas offer loan facilities.

Not all banks will enter into lending transactions with overseas-based buyers. Conducting negotiation, credit evaluation and administration at a distance or with "post office" operations could cause delays and other frustrations.

Some lenders might even send correspondence by surface mail in order to reduce their costs.

Check on the loan processing time, especially if you are working within a tight timeframe.

You should also be aware that many overseas-based lenders target borrowers who are locally-based owner-occupiers.

Their loan terms are geared to meet the needs of this market rather than those of Asia-based investors, who often require specialised handling.

Lending restrictions

Remember that some lenders will not consider applications in the following circumstances:

- The proposed legal owner of the property is a company or trust;

- The borrower/guarantor of the loan is self-employed; or

- The property is not to be occupied by the owner.

Repayment methods

There are complex tax implications to consider that vary according to the chosen repayment method.

This is a particularly important consideration if you are buying the property for investment purposes, or looking to rent it out and receive income from it, rather than to occupy it.

Some repayment methods are far more tax-efficient than others.

Seek a lender who is in a position to advise you accordingly and provide a range of repayment methods.

A desirable facility is the ability to switch to another repayment method during the life of the loan so as to enhance flexibility.  

Repayment periods

Some lenders cap their loan periods at 10 or 15 years, or provide loans only up to age 55. Others lend over periods of up to 30 years and to age 70.

Loan to value ratio

The amount that you can borrow, in relation to the value of the property, varies between lenders.

Some will offer a maximum of 70 per cent in the case of investment properties; others will offer 80 per cent or more.

Other considerations

Some lenders levy a fee for processing a loan application even if the application is rejected.

Some lenders insist on separate legal representation for the borrower and the lender. This will increase legal costs.

Article contributed by Lloyds TSB Bank