When buying a summer home abroad, people face many questions. Where to start? What kind of loan to take out? What exactly should be taken into account? An expert from Citadele Bank outlined the main points that should be taken into account. Marina Hakiainen, Head of Retail Banking at Citadele, explained that buying real estate abroad is still the preserve of wealthier people, but over time it is becoming more accessible to ordinary citizens: “Countries with a warm climate, such as Italy and Spain, are popular among Estonians, and, judging by the statistics of bank card use, they are consistently in demand as holiday destinations.” The country where you want to buy real estate determines the purchase process itself and the final price. “Different countries, as we know, have different laws regarding buying real estate on credit, operating permits and cadastres, additional fees, renting residential space and much more,” Hakiainen said. She recommends starting this long process by finding a local consultant: for example, a broker or lawyer who knows the real estate market and laws well. "It will be able to support the person from the very beginning and help to avoid unpleasant situations, when, for example, some additional fee or obligation becomes a surprise for the buyer," Hakiainen explained. If a person wants to live in Estonia, but buy a summer home abroad, they can apply for financing from Estonian banks. For example, a loan secured by real estate or a consumer loan for buying an inexpensive apartment is suitable for buying real estate abroad. However, it is not possible to buy real estate abroad with a home loan. "A home loan can only be taken out from a bank in the country where the person works and pays taxes," Hakiainen noted. According to her, the real estate used as collateral for the loan must be located in Estonia: "If a person wants to buy, for example, an apartment in Finland, this apartment cannot be used as collateral for the loan." The reason is the differences in the laws and practices of countries in the process of assessing and recording collateral. If the purpose of buying foreign real estate is to move to that country, you should contact the bank of the destination country. “It is important to remember that applying for and receiving a loan depends on the laws and regulations established for banks in the destination country,” said Hakiainen. As with any other loan, when issuing a loan for purchasing real estate abroad, the bank assesses the person’s solvency. “The bank makes calculations based on income and existing financial obligations: loans, credit cards and leases, and the process itself is the same for each loan,” explained Hakiainen. Based on this, the maximum amount that a person can borrow is also determined. “The general rule is that all loans, leases, installments, guarantees and other credit obligations should not amount to more than 40% of the household’s income. This also includes payments on a planned new loan. At the same time, the bank also takes into account a situation where, for example, Euribor may increase,” said Hakiainen. Hakiainen drew attention to the fact that the interest rate on a loan secured by real estate is usually higher than on a home loan, and the repayment period is shorter: "This means that a person can borrow a smaller amount of money than, for example, with a home loan, since the creditworthiness ratio is lower." Also, compared to Estonia, when buying real estate abroad, a loan can be obtained for a smaller part of the collateral value: in the case of Citadele Bank, in the case of purchasing foreign real estate – up to 75% of the collateral value, while for real estate located in Estonia – up to 95%. "This must be taken into account from the very beginning in order to choose a property that meets your wishes and financial capabilities," Hakiainen added. The bank takes into account wages, family benefits, parental salaries, dividends and disability benefits as income. “One-off income, such as fees and bonuses, is not included in the income, as it does not have a significant impact on a person’s financial situation,” Hakiainen noted. Salary from abroad and rental income are not taken into account by the bank in full when issuing a loan, but with a certain coefficient. “The process is very similar to buying real estate in Estonia: you need to find a suitable property and a competent consultant, understand the laws and obligations, and apply for a loan. Then the bank evaluates the person’s creditworthiness and the fulfillment of their previous credit obligations. In addition, you need to provide the bank with an appraisal of the collateral. If everything is in order, you can conclude a loan agreement and formalize the mortgage with a notary,” Hakiainen said. The real estate purchase and sale agreement must also be sent to the bank within three months of the transaction.
