Crackdown on holiday home loans as dreams are dashed by bureaucrats

Published 27th Jul 2011

Hundreds of Britons have had their hopes of buying a dream holiday home in France, Spain or Italy dashed ahead of tough new rules from banking bureaucrats.

Would-be buyers are being forced to choose between losing the property or forking out for last-minute deals at less favourable rates.

It spells problems for families wooed by the idea of buying a home overseas while on their holidays this summer.

John Busby, director at international broker Athena Mortgages, reports a sharp rise in the number of mortgages falling through, as French banks in particular become more wary of British customers.

‘Banks have become extremely cautious,’ he says. ‘It’s not that hard for them to find a reason why the application should not go through if the client does not match their particular criteria.’

Those on incomes under £60,000 and who may have saved for years to afford a holiday home are among the worst hit by the changes.

New rules, which are to be introduced over the next two years in response to the banking crisis in 2008, will mean banks tighten lending, while rental income from any of your properties may be discounted.

This means the amount buyers are allowed to borrow is based solely on their salary.

Total borrowing is allowed to be only six times more than their overall income. So, if you earn £50,000 and have a UK mortgage of £200,000, you could borrow a maximum of £100,000 to buy your home abroad.

Previously, the rules were not so rigid. Banks would be more likely to take into consideration rental income to allow buyers to borrow that little bit more.

BNP Paribas, a leading French bank, has made the biggest changes so far and recently slashed the mortgage term on its interest-only loans from 20 to seven years.

Brokers say hundreds of buyers were left in limbo when these conditions were introduced suddenly, forcing them to pull out of deals because they could no longer afford the repayments.

Second home owners usually take out interest-only deals - where the capital is never repaid - because it means cheaper monthly repayments.
They either sell the house or, if possible, remortgage when the original term expires.

Cutting the length of time for mortgage terms means repayments are increased, and they have to take a new deal sooner.

Clare Nessling, director at mortgage broker Conti, says: ‘When BNP changed its lending criteria it was horrendous.

‘There were a lot of people whose loans were being processed that fell through with hardly any warning.’

In a further move, brokers say BNP is demanding a minimum 25 per cent deposit on interest-only loans, when previously it would accept a 20 per cent deposit.

A spokesman for BNP stressed that British buyers remained an ‘important clientele’.

Other French banks have followed BNP’s lead by tightening their terms, say brokers.

It is now common for British buyers to have mortgage applications scrutinised by a committee, when a single signature would have been enough in the past, say brokers.

And, increasingly, banks are making life insurance a compulsory part of a mortgage offer.

Banks in other European countries are also becoming stricter. In Spain, you need a minimum 40 per cent deposit and can get an interest-only mortgage for only two years before having to go back to capital and repayments.

In Italy, you need a minimum 20 per cent deposit and cannot opt for an interest-only mortgage.

Meanwhile, in Portugal — which was bailed-out by the EU in May because of its crippling debts — brokers say mortgage options for UK buyers are severely limited because of the country’s financial problems. If you do get a loan, you will need at least a 20 per cent deposit.



CASE STUDY

'Our mortgage was suddenly pulled'

Mark Powis and his partner, Angela Keepax, from Redditch, Worcestershire, came within a whisker of losing their dream home in France after their mortgage provider pulled out.

Mr Powis, 48, who runs an insurance business, and Ms Keepax, a teacher, had taken out a mortgage of €484,000 (£427,534) on the property in Gascony with French bank BNP Paribas.

The couple had to put down a €85,000 (£74,123) deposit. But as the deal neared closing, BNP Paribas withdrew.

Mr Powis says: ‘It was our dream home. We were left in a state of total shock.’

The couple finally managed to find a deal with French bank BPI, through broker International Private Finance, after putting down a bigger deposit, paying life cover of €114,000 (£101,038) a year and a heftier arrangement fee. But the rate, 2 per cent, is lower.

BNP Paribas said it would not comment on individual cases.

Source: ' ThisIsMoney '

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