Financing a property

On this page we are going to talk a little bit more about how you can finance a vacation property abroad.

Using your own money or a loan

savingsIf you are fortunate enough to be able to afford a property without having to take out a loan then it is easy to finance your purchase. You can simply use some of your savings to pay for the house. But is this really the best option? It can often be best to buy a vacation property on credit even if you can afford to pay it outright.

The reason for this is that the interest rates are currently very low. This gives you access to very cheap loans. It is possible to find a mortgage that cost you less then 3% APR a year. In the current market conditions you can easily find high quality stocks that give you a dividend that is worth more then 3%. It is therefore worth to invest your money in dividend stock and use a loan to buy your property.

If you invest your money in a dividend stock that gives you 4% in dividend and pay 3% interest on the loan then you will earn 1% each year that you would not earn if you used your own money to buy the house directly. If the stock appreciate in value then you will earn even more. A more likely scenario is that you will earn 5-10% a year by using financing to buy your vacation property.

If you invest in more exotic financial instruments such as binary options, CFD:s or futures you might be able to earn an even higher return each year.  As long as your return on investment is higher then the interest on the mortgage you should chose to use a mortgage to buy the house.  You can read more about different options and other investments here.

In the current marker conditions it is almost always better to use a loan to buy your property. You might want to pay down the loan in the future if interest rates start going up. I recommend that you re-evaluate whether you should keep the loan or pay it of once a year.

Borrow money abroad

It can be hard to be allowed to borrow money abroad since you do not have any income in the country where you want to buy the house. This makes it very hard for the bank to asses the risk they are taking and banks do not like risk or unknowns. It is usually next to impossible to get a loan in Italy if you do not have any income in Italy. It might be possible to get a mortgage if you are able to pay a very large down payment. Large enough that the bank will feel that is has adequate security even to it does not know how much you own. A large down payment does not guarantee that you can get a loan.

I generally recommend that you try to finance your purchase in the country where you live and earn an income. Another reason to borrow in your native country is that you are likely to know the banking system better there. The Italian system might offer surprises if your native country have a different system then Italy.

Borrowing money at home

The best option is usually to finance your house by getting a loan at home. There are several ways to do this. What the best way to do this is depends on how much money you need to borrow.

Personal loans

A personal loan is a type of unsecured loans. They are more expensive than mortgages but it is still possible to find well priced personal loans. How much you can borrow depends on your income and credit score. Personal loans tend to be smaller then mortgages. A personal loan can be a good option if you only have to borrow USD 100 000 or less to buy the property. You might be able to borrow more if you earn a high salary.

Use equity in your house

moneyThis is often the best alternative available. If you have owned your house for a while and if it has appreciated in value then you might have unused equity in your house. You can use this to increase your mortgage or take out a second mortgage on your house. You can then use the money you get to buy your vacation property. This is usually the cheapest credit that will be available to you. You offer the bank a good security and will get a low interest rate. You are repaying your mortgage over a long time period. The increased monthly cost of owning a second house will therefore be low.

The flip side of this is that you risk your home if you are unable to make the payments on the loan. Never take out a second mortgage if you are not sure you will be able to pay it of.

Owner financing

Some sellers are willing to offer owner financing when selling their house. This can be a very good option if you can agree on a payment plan that suit both of you. Some owner offer 0% financing. 0% financing is financing where you do not have to pay any interest,

Owner financing has a number of benefits. It is available even if you do not have an income in the country and can often be a very cheap type of credit. The drawback is that owner financing often requires you to pay back the money a lot faster then other types of financing. Owner financing usually run over 5 years or less.

Borrow money from friend/family

Never borrow money from a friend or from your family to buy a vacation property. The loan is likely to strain your relationship over time. Also do not recommend buying a house together with anyone else.