Future Returns: Finance Options for an Overseas Luxury Property

If you’re hoping to buy a vacation or investment property outside the US, you’re sharing that dream with numerous other wealthy individuals.

In a survey of more than 2,000 high-net-worth Americans by Coldwell Banker Real Estate, 92% actively looked at real estate overseas in 2022 and 67% of those surveyed already own residential property outside the US

“We have numerous clients ask us about financing vacation homes abroad,” says Jonathan Kessler, executive vice president, head of credit and cash management solutions for PNC Private Bank. “While we don’t do residential lending outside the US, we offer multiple tools they can use to buy property overseas.”

A mortgage from a local financial institution in the country where you want to buy a home is sometimes an option, says Kessler, but they’re not always available.

“Even if you can get a mortgage from a local lender, there may be residency restrictions or restrictions if this is a second home,” Kessler says.

Still, you can always ask the real estate agent or attorney in the international destination you prefer about a local mortgage option and its requirements.

“In some cases, the sellers may offer their own financing, particularly if you can’t get a local mortgage,” Kessler says. “This isn’t normal, but it’s theoretically another way to finance an overseas purchase.”

In that case, the buyers should consult their own attorney and accountant to protect themselves in the foreign country.

Cash Is King

Many high-net-worth individuals choose to pay cash for an overseas purchase.

“Buyers who want to move fast on a property or who are looking in a competitive market are likely to use cash for their purchase,” Kessler says. “The disadvantage of using cash is that it reduces your flexibility. If you spent millions on an overseas property, you may not have the liquidity in hand to take advantage of a business opportunity or a market opportunity.”

Unless you’re renting the property for income, an overseas purchase can’t be monetized until you sell it, Kessler says. For a property in the US, you can mortgage it or take out a home equity line of credit, or HELOC, to access the equity, but you can’t usually do that with an international property, he says.

For some overseas buyers, the cash to buy a vacation or investment home comes from the sale of another property in the US or overseas.

“One thing buyers need to keep in mind is currency rate fluctuations,” said Kessler. “Even if you’re paying cash, you’re committing to a one-time currency exchange implication when you buy the house and another when you sell. Depending on how you structure the purchase, there could be an ongoing exchange rate implication.”

For example, the dollar was worth 0.90 euros on April 12.

“That means US$1 million gets you €900,000, plus you’ll pay a transaction fee to exchange currency,” Kessler says. “You’ll have that same issue when you sell the property and want to repatriate the funds.”

Tapping into Home Equity

Since many wealthy individuals own one or more homes without a mortgage or with significant equity, their equity can be a source of funds for an international purchase, Kessler says.

“A cash-out mortgage can be a simple and attractive way for well-qualified homeowners to access equity on a property unencumbered with a mortgage,” Kessler says. “Even though mortgage rates are higher than they were last year, they’re still not historically high.”

If you have a mortgage on your property, you can apply for a cash-out refinance. However, Kessler says, most homeowners have an extremely low mortgage rate today, so it may not be worthwhile to refinance into a loan with a rate that could double their interest rate.

“In that case, a better option may be a home equity line of credit,” Kessler says. “You can draw down that line of credit to buy a home in a foreign country.”

A HELOC offers the advantage of low or no fees, while a new mortgage or refinance typically has transaction fees and closing costs, Kessler says.

“HELOC borrowers don’t have payments until they draw down the funds, which gives you more time to look for property without making mortgage payments as you would with a new loan,” Kessler says. “HELOCs typically have a floating rate, but many lenders including PNC offer flexibility and allow you to lock tranches of money into a fixed rate with a choice of how many years you want to take to repay the funds.”

Once the draw has been repaid, the funds are available again with a HELOC, unlike a first mortgage.

Securities-Backed Line of Credit

Instead of borrowing from home equity, some international property buyers may be tempted to sell securities to generate cash for real estate, but that could trigger tax implications and a potential sale on unfavorable terms. Instead, wealthy individuals can consider a line of credit backed by their assets with a bank or other financial institution, Kessler says.

“The advantages of a securities-based line of credit are that you can set one up quickly at no cost,” said Kessler. “The collateral is very liquid, which means the bank charge is less and it’s simple to set up. Many clients put these in place because you don’t need to use them until you actually need the funds.”

Borrowers can choose to float or fix the rate on these lines of credit, Kessler says.

“Depending on the size of the loan and the sophistication of the client, borrowers can manage their interest-rate risk with a swap agreement with their bank,” Kessler says. A swap agreement is a contract between the borrower and the lender to exchange floating and fixed interest rates at different times.

In addition to financing the purchase, Kessler says overseas property buyers may want to open a bank account in the country where they’re buying to manage ongoing expenses in the local currency. Some of the other factors to consider before buying overseas include residency and visa requirements, taxes, and rules about foreign nationals selling or inheriting property, he says.