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Buying overseas property – where do I find the cash?

Whatever happens to property values at home, remember this: there are plenty of places cheaper than Britain!

House prices in the UK might be dropping, but many British homeowners still have plenty of equity to draw on, if that’s how they’re planning to finance a purchase abroad. Whether a remortgage is better than a secured loan is something you’ll have to discuss one-to-one with a financial expert, but let’s take a look at equity – let’s look at where house prices stand today, and where they may stand next year.

No-one knows for sure where house prices are going, but a few experienced people have made ‘educated guesses’ which could help us figure out what to expect.

For example, according to Graham Beale, Nationwide Building Society’s Chief Executive, house prices could fall by 25% from their peak. Taking this as a starting point, we can do a few calculations…

• Nationwide’s own House Price Index reports that the price of the average house peaked at £186,044 in October 2007.

• 25% of £186,044 is £46,511, so a 25% drop would take the average price down to £139,533.

• In September 2008 (the last month for which data was available when this article was written), that ‘average’ price had dropped to £161,797. That’s a drop of £24,247 – about 13% of the peak price.

• In other words, the average house should fall about another £22,264 if it’s to sink to £139,533.

No-one would expect any prediction to be 100% accurate. There are far too many unknowns involved, including the psychological effects of making predictions – how many buyers / sellers will make a move sooner or later than they would have done if experts were predicting a drop of 15%, or 50%, or not made any predictions at all?

Even so, an expert’s opinion can be a good starting point. Today, someone with a £50,000 mortgage on a £161,000 ‘average’ house might feel confident about remortgaging, withdrawing £50,000 of equity – they’ll then have a £100,000 mortgage, but £61,000 of equity left, of which they might expect to lose another £20,000 or so before house prices start recovering.

What’s more, plenty of mortgage providers are still offering remortgages of 75%, or even more. If the homeowner in our example decides this is the right move, they should be able to find the remortgage they’re looking for.

Mr Beale’s prediction would have to be seriously off for them to fall into negative equity by remortgaging like this. House prices would have to show a ‘peak-to-trough’ drop of over 45% for the value of their house to fall below £100,000.

At the end of the day, it’s all down to timing and ‘appetite for risk’. If someone needs to move fast to grab an excellent bargain abroad, they may feel it’s worth risking negative equity. If they’d rather not, it’s obviously safer not to remortgage their UK property until UK house prices start climbing again. Of course, when that happens, there’s no way of knowing how long it’ll take before they start dropping again – as they inevitably will…

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