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» PROPERTY FOCUS: Bulgaria's Ownership Act changes
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» The Cost of Living in Bulgaria
» Buying property in Bulgaria
» BG property is the countries fastest growing asset
» Financing a property purchase in Bulgaria
» Driving your classic car to your Bulgarian property and all via a pension
» Bulgarian Property, a good proposition or investment Bubble
» Important DSK Mortgage Information
» Property Awards, What are they Really Worth?
» Buying in Bulgaria, UK Mortgages v Bulgarian Mortgages
» Britons Find Bulgarian Prices are Right for Holiday Homes
» Britons Buying Abroad
» Bulgaria Growing in Popularity
» Bulgaria "Top Country for Holiday Makers, Property Investors"
» Residential Prices In Bulgaria Up 36%
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» London Funds to Invest 400M in Bulgarian Properties
» Funds plan Hundreds of Millions for Property Investments
» Brits Fall For Bulgaria's Charms
» The Rise of BG property
» Bulgaria Leader in Real Estate Yields
» Bulgaria on course for 2007 EU accesion
» Bulgaria and Romania to join EU in 2007
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» Bulgaria Names Amongst Top Countries For Investment Opportunity
» British Embassy Advises Investing In Bulgaria
» Bulgaria`s Real Estate Trusts Attract UK Investors
» All Time High In Bulgaria`s Property Sales
» Bulgaria Increasingly Attractive To Foreign Investors
» Bulgarian Property Market May Get Huge Boost From Tax Changes In Britain
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» Bulgaria - Top Country for Holiday Makers, Property Investors
» Low-cost Wizz Air Launches New Routes From London To Sofia, Burgas
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» Bulgaria's Real Estate Market Marks Europe`s Highest Growth

Buying in Bulgaria, UK Mortgages v Bulgarian Mortgages
 

Over the last 18 months we have been inundated with requests from people wishing to raise capital in order to purchase in Bulgaria. In the early days the only option was to raise money in the UK via either a re mortgage, secured loan or personal loan. Then Piraeus entered the fray with the first mortgage available to foreigners buying in Bulgaria. This was a good start but the underwriting was far too tough and meant that a majority of buyers could not meet their criteria. After months of negotiation we then released a mortgage funded by DSK bank. This mortgage was far easier to obtain and approximately 90% of applicants get accepted. So by July 2005 two lenders were prepared to lend to UK citizens, this was just the start. As with any business as soon as the trail blazers enter the market and prove it can be done others will follow. We are currently in negotiations with a host of new lenders in order to provide lending options for people buying in Bulgaria. So with more and more options becoming available Quest have asked us to provide a little information as to the pros and cons of UK verses Bulgarian mortgages as well as to explain how a property investor can make superb returns by the appropriate use of mortgage finance.

For this article I shall make up some typical clients. Mr and Mrs Simpson earn £30,000 between them, have a UK property worth £200,000 and a current UK mortgage of £100,000. They have just agreed to buy an apartment in Bansko for ˆ80,000 and will be making staged payments of 30% on contract, 40% at roof level and 30% on completion. They have £30,000 available after cashing in an old endowment. They are also potentially interested in building a property portfolio in Bulgaria and would like some advice as to how this could be achieved.

Option 1 – Re mortgage in UK and buy property in Bulgaria in cash.

Assuming they were not tied to their existing lender Mr and Mrs Simpson could release equity from their UK home. This would be a simple process and a vast majority of clients could expect to release at least 85% of the valuation of their property. There are over 8,000 different mortgages available in UK. The benefits of borrowing in UK would be; Cheaper interest rate, typically could expect rates of between 4.5%-5.5%, this is cheaper than the typical 7% rate available in Bulgaria. Upfront and completion fees are generally a little lower than for a Bulgarian mortgage. The advice would be provided by an FSA (Financial Services Authority) regulated adviser and hence the client would have a come back against bad advice. The process is a little quicker and they could get all the money in advance of the staged payments being required and this would reduce the stress of hitting stage payment and completion deadlines.

However, there are also negatives. You would need to consult accountant to make sure that the interest payments for the amount you have borrowed to buy in Bulgaria are tax deductible against any rents you may receive in Bulgaria. Also you will have put your own main residence at a greater risk of repossession, if you did not get the expected rents from the Bulgarian property and could not afford to keep up payments on your UK mortgage you may risk repossession.

Mr and Mrs Simpson would end up with a mortgage in UK of approximately £150,000 and a property in Bulgaria that they own in cash. If they wanted to expand their portfolio in Bulgaria they could then look at borrowing in Bulgaria using a Bulgarian mortgage and raising money to buy more properties.

Option 2 – Ignore the UK and secure mortgage against Bulgarian property.

In this case Mr and Mrs Simpson have decided that they do not want to risk the home stead for a little property speculation in Bulgaria. They understand that the money they raise in Bulgaria will be more expensive that capital raising in the UK but think this is a fair trade for peace of mind.

The main advantage of getting a Bulgarian mortgage is that the mortgage is secured against the Bulgarian property and hence if they cannot afford the mortgage it is only the Bulgarian property that would get reposed and this would have no effect upon their UK residence. This is a favoured option of many aggressive property investors who are prepared to take a risk but also want to manage any downside. If the mortgage is paid from your Bulgarian bank account and if this account is also the one where rent is paid it becomes much easier to correctly work out the net profit from letting a property in Bulgaria. When taking out a Bulgarian mortgage you also have other independent companies such as ourselves and the legal representatives of the lender who check that you are buying the property correctly, this is particularly important for correct registration of property and declaration of full purchase price on notary deeds.

There are no regulatory authorities who monitor or impose rules upon international mortgages and hence you could be at risk of receiving bad advice from inexperienced or plain fraudulent advisers. We ensure that all advisers work to the same best advice guide lines required for UK financial advice.

If the Simpsons wanted to build a portfolio then they would need to release funds from their UK property for further deposits or if their Bulgarian property substantially increased in price then they could look at refinancing this to raise sufficient capital to make another 30% deposit.

As property prices are still relatively low in Bulgaria many people can still afford to buy in cash (lucky them!), however, if you are wanting to build a portfolio this is not often the best option. Using finance to buy property is called gearing. Just like the gears on a bike you are using your little deposit (small cog) and then the larger funds from a lender (large cog) to be able to make your money go relatively further. It is this that made many buy to let millionaires in the UK. When gearing is used alongside a property market that is experiencing rapid price rises the result can be the creation of substantial wealth. Imagine you had ˆ100,000 to spend, you could buy a single property in cash or you could buy three properties using mortgage finance.

If the market then increased at 20% per annum (optimistic but could potentially happen). If you bought in cash after 3 years you would have a single property worth ˆ172,800 and hence you would have made ˆ72,800 plus rental income of (assume 7% per annum or purchase price of ˆ100,000) ˆ21,000. A very pleasing return of ˆ93,800.

Alternatively if you used gearing then after 3 years you would have ˆ518,400 worth of property minus ˆ210,000 of mortgages, also assume no rental income as this has been used to pay the mortgage. The net result would be an increase in funds of ˆ208,400. Compared to the cash option of ˆ93,800, using mortgage finance has made a very good investment into a spectacular one. Obviously this is a riskier strategy but it must be said that over past 8 years it has worked very well for nearly everyone who has adopted it.

The main thing is to understand exactly why you are investing in Bulgaria, have a plan, do not believe everything you are told and do not be greedy.