Buy property in Italy with equity release

The first thing is that you don’t necessarily need to have won the lottery or been salting away savings to buy that villa in Umbria or Tuscany; neither do you need to be selling existing property. Equity release is a well-established principle with UK and US mortgage lenders these days and – despite a slew of scare stories in the press – can be a sensible way to have your cake and eat it.

Keeping the figures nice and simple — we’ll work in euros here to avoid having to constantly convert back and forth — here’s how it might work. You bought your home in Chelmsford, Essex (or Chelmsford, Massachusetts) on a 90 per cent mortgage, for €100,000 15 years ago, putting down a deposit of €10,000. You’ve paid off a big chunk of the mortgage in a decade and a half — your outstanding mortgage is now just €50,000. But a rising market now sees that house worth €300,000: you find yourself sitting on €250,000 equity in your semi or duplex.

Meanwhile, you’ve seen a farm with potential in Umbria for €250,000 and you decide to buy on a 90 per cent mortgage — you’ll need a deposit of €25,000. Maybe you want to sell up back home. But maybe you just want to buy a holiday house and keep the place back home. You could have your home remortgaged, revalued and release €50,000, enough to secure your mortgage, pay your deposit and have plenty to refit and furnish your Italian property. You now own €550,000 worth of property. You’ll find more about how you could make money from your property, spread your investments and potentially grow a pension pot in Italian property as an investment below, but for now let’s simply deal with raising finance to buy your Italian home.

Getting the mortgage for your purchase in Italy

The remainder of the finance will come in the form of a mortgage from a lender registered to lend mortgage funds in Italy. So you can’t just roll up to Barclays in Lewisham or the downtown Chase Manhattan and get a loan. You do have a lot of choices however. There are Italian banks, such as the Monte dei Paschi di Siena. You’ll find Italian branches of UK and US institutions — Citibank and NatWest are just two with a serious presence in Italy. And there are third-country, offshore and international banks, the likes of ABN Amro and tax-wise Channel Island institutions.

However you do it, you’ll find Italian mortgages (for this is what you’ll have) the same in principle to the UK or US equivalent. A mortgage is a loan to you, to enable you to buy a house. This is secured against the value of the property you’re buying. Default on your payments and the security (your Italian real estate) can be repossessed.

A point of clarification here. You should appreciate the difference between a UK/US and an Italian mortgage. This is based on the property being mortgaged, not the property being bought — a crucial distinction. If, to buy my Italian home, I released equity from my UK home, I would have a UK mortgage. I could even raise the whole amount, and I would then be buying the Italian home for cash. If, however, there is a mortgage against the Italian property, it will be via an Italian mortgage, a loan raised in Italy. Don’t imagine you can buy your Italian property on a mortgage with a UK or US mortgage loan … you can’t. For various reasons we expand on below, you may find it easier to raise a UK or US mortgage first, then buy for cash.

Italian mortgages to buy Italian real estate

You will find Italian mortgages different in some respects. The most obvious difference is interest rates. Base rate in the Eurozone has been around the 2% mark for well over a year, slightly expensive to Americans currently enjoying base rates of 1.75% but very cheap compared to UK base rates of 4.75%. We hardly need say that these figures are reviewed on a monthly basis and nothing is guaranteed, but with the Eurozone economies not setting the world on fire at the moment those rates aren’t likely to increase dramatically.

The base rate is far from the whole story of course, and the different structure and history of mortgage lending in Europe (very different to the UK for instance) means other charges and conventions apply. Italians haven’t traditionally been such enthusiastic buyers and sellers of property as Britons and Americans (and they certainly don’t use their homes as vehicles for investment and speculation in the way the British do). Home ownership is high, around 68% in Italy and the UK, compared to 59% in the US, but when Italians own they tend to stick … and traditionally more homes have been bought for cash rather than financed by mortgages.

Italian mortgage business compared to UK and US

So there’s less mortgage business and the retail banks are less competitive and aggressive as a result. You’ll find the set-up fees from the bank high compared to home. It’s not unusual to get a mortgage in the UK with the lender paying your fees as a marketing carrot. In Italy? Forget it. When you remember that fees to estate agents and taxes are high also, you begin to see why the transaction costs are high compared to home.

Forget PEP, endowment and interest-only mortgages. The exotic products that have infested the UK and US mortgage markets in recent years are unknown in Italy. Here you’ll repay your mortgage the old way, gradually chipping away at the debt, though it may well be over 15 or even 10 years rather than the 25 we’ve come to expect. Your bank will probably also stipulate the loan be repaid by your 70th or even 65th birthday.

They are also unlikely to lend you more than 80% of the property value (and 60% is more common). This far more conservative system is a bit of a shock that Britons — it’s certainly far harder to get rich by playing with the equity in your home. On the other hand it’s a lot more stable, leads to fewer booms in prices, and is less subject to busts. Maybe they’ve got a point?

Fixed-rate mortgages in Italy

UK Chancellor Gordon Brown got short shrift when he suggested another Euro idea for bringing stability to the UK mortgage and property market. Fixed rate loans have proved very popular in Italy — typically your tasso fiso might be 1% or so above base and be fixed for the whole term of your mortgage. These obviously depend on interest rates being less volatile than in the UK (they are) and they tend to be attractively priced. Just as in the UK and US there is likely to be a minimum loan amount (€30,000 would not be untypical). So if you are buying a property of €50,000 or less (at this price likely to be a shell) you’re doing to have to do so either from equity release or savings.

Another note that will strike UK borrowers as conservative: Italian banks calculate the amount they will lend you differently. It used to be lenders in Britain would lend 2.5 times your annual salary, but rocketing UK house prices have pushed this up to multiples of 3 or 4. Come back down to earth. Italian lenders calculate the loan on your monthly repayments (easier to do in a system where so many are on long-term fixed deals and interest rates also tend to be stable). And the advances are low, no more than a third of your net disposable income. Your bank will help you work this out, but we suggest you whip out the calculator and start doing the maths now: no point in aiming for a €500,000 apartment in Venice when you’re realistically in €250,000 territory.

Stage payments on Italian mortgage

Be aware too that the release of funds on a refurbishment or rebuild (the ‘stage payments’) are handled differently than in the UK or US. Major refurbs obviously account for a big slice of UK and US buyers coming into Italy, so even if you’re just planning a new bathroom and kitchen, be aware of this. And you’ll find the paperwork different to home. The sacrosanct mortgage deed may not even exist, with the existence of the mortgage mentioned only in your purchase deed, which will be signed before the notaio.

Be aware too of the fluctuations in interest rates. You may look at the relative values of the dollar, the pound and the euro and decide it makes more sense just now to take out an Italian mortgage. Of course at some point you have to convert from your home currency anyway, whether you’re taking a euro mortgage direct (converting your £s or $s to €s each month), or mortgaging at home and then buying a house in Italy for cash (converting your £s or $s to €s in one go). You may have a long-term view on how rates are going to go, but that’s too much for most of us to think about. What you do have to consider is the uncertainty that monthly exchange rate fluctuations build into your mortgage payments — not just base rates to worry about but the relative values of £, $ and €.

You can also opt to go offshore for your mortgage. The Channel Islands of Guernsey and Jersey, The Isle of Man, Liechtenstein, Switzerland and Luxembourg all have banks competing eagerly for the financial accounts of expats. The savings here tend to be from tax efficiency rather than in preferential interest rates.