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Financing a Fractional Home Abroad

How to finance a fractional property

While it is possible in theory to finance a fractional home, many fractional real estate transactions today are done without financing. Fractional ownership in real estate is still a relatively new concept and many traditional banks are not aware of it, and therefore do not offer financing for this type of property. The most straightforward option is paying in cash to purchase the shares outright. This is the simplest method but it also implies a large sum of liquid funds available. So, what options are available to finance a fractional property? Here are three options to finance this kind of home.

1) Mortgage funding / Fractional Loans

Although traditional banks and building societies do not offer financing on this type of asset, a few institutions specialise in loan products aimed at financing the acquisition of fractional homes.

2) Equity release

Homeowners with sufficient equity in their primary home can tap the equity to finance the purchase. Equity is the value of how much of the property is owned. In other words, it is the difference between the market value of the home and the amount owed on the mortgage and secured loans. For example, if the home is worth USD 500,000 and the mortgage balance is USD 300,000, that means the equity in the property is USD 200,000. All or part of the purchase can be covered by using the equity. Releasing equity is a way to free up some of that value as cash. Here are some of the most common options:

  • Home Equity Line Of Credit: also known as a HELOC, it is a line of credit secured by the equity you have in your primary residence. As the house is used as collateral for the line of credit, HELOCs tend to have lower variable interest rates than home equity or personal loans.

  • Home Equity Loans: this is another method to borrow money via the equity in your primary home. If a HELOC resembles a credit card, a home equity loan is more like the original home mortgage. You can borrow a set amount at a fixed interest rate and repayment term. The loan is paid back in fixed instalments, just like a conventional mortgage.

  • Cash-out Refinance: it is a mortgage refinancing option that lets you convert your primary residence's equity into cash. In other words, a new mortgage is taken out for more than the original mortgage balance, and the difference is paid in cash. This can be a good option when the interest rates on the new mortgage are lower compared with the current one.

3) Financing offered by the developer / property manager

Some developers work with banking partners to offer integrated financing. A down payment of 20% to 50% of the share price is usually required, and the loan is amortised over a relatively short period of time, 5 to 10 years. Here are some recent examples of conventional financing currently offered by fractional ownership companies (as of February 2023):

  • Pacaso: financing of up to 70% of the fraction (through Santander Bank)

  • Ember: 3.99% financing available on certain homes

  • Vivla: financing of up to 100% of the fraction (through Andbank)

Also, with cryptocurrencies becoming more and more mainstream, a few developers now accept Bitcoin and equivalent cryptos as a payment option.

Buying property abroad: the impact of currency exchange rates

It is important to understand the risks associated with purchasing a property abroad. When buying a house in a foreign currency, the exchange rate between the local and foreign currency will impact the sales price, and therefore getting the best rate can make a big difference. For every USD 100,000 a 1% move will have an impact of USD 1,000. Taking the example of a French buyer looking to purchase a house in the US: a house listed for USD 300,000 would have cost him/her around EUR 261,000 back in November 2021 when the EURUSD exchange rate was at 1.15 (1 EUR = 1.15 USD). One year later, in November 2022, with EURUSD at 1.00, the exact same house would now cost him/her EUR 300,000. 

Three key considerations when purchasing a home abroad

1) Timing is key

Interest rates, monetary policy, and financial stability will affect the demand for a country's currency, and therefore the currency exchange rates. Currencies fluctuate on a daily basis based on supply and demand. Foreign exchange markets are unpredictable and exchange rates can suffer dramatic moves over years, sometimes in just a matter of weeks. A currency specialist can monitor the rate on behalf of the buyer and secure an exchange rate locking in it for up to 24 months (this is known as a 'forward contract'). This solution is popular among international property buyers as it gives peace of mind by removing the exchange rate risk from the equation. Using the same example as above, the buyer now locks the rate at 1.15 (1 EUR = 1.15 USD) in November 2021. If the exchange rate moves from 1.15 to 1.00 a year later, that USD 300,000 home would still cost him EUR 261,000. 

Popular specialist foreign exchange brokers, such as MoneyCorp, Caxton FX, or Currencies Direct usually offer this service.

2) Getting the best exchange rate

Because of the large sums of money involved, it is paramount to shop around to get the most attractive exchange rates, and the lowest transfer fees possible. The total cost needs to be considered, not just the actual exchange rate. ​Those are the two types of charges to look at:

  • the transfer fee

  • the exchange rate

The transfer fee

A transfer fee is a fixed flat fee charged for every international currency payment made. The charge varies from one provider to another: while some transfer specialists do not charge any transfer fee, high-street banks typically have high currency transfer charges, ranging on average between £20 and £40 per transaction in the UK. In the US, banks commonly charge fixed fees of between $30 and $50 per transaction for outgoing international wire transfers. 

The exchange rate

Every bank and money transfer specialist set their own exchange rates, which will normally be based on the interbank rate (the 'real' rate), plus any markup they would like to include. Therefore, it can vary massively from one provider to another, with some traditional banks adding a charge on conversion as high as 4%, thus not offering the most competitive rate. Wise (formerly TransferWise) provides useful tools to compare providers. As reported by their research, Wise is on average 4x to 8x cheaper than leading national banks (5x cheaper in France, 4x in Germany, 8x in Spain, 6x in the UK, and 4x in Switzerland).

3) Safety: using an authorised payment institution is crucial

Property transactions involve large sums of money. For something as critical as a property transaction, it is highly recommended to use an authorised company. Those companies must meet certain obligations. The most important from a customer's point of view is to do with the segregation of client money: an authorised company must transfer any client money through a separate and safeguarded bank account. As a result, if the company goes bust, client funds should remain intact. Companies that provide money transfer services have to be registered with the local regulator: the Financial Conduct Authority (FCA) in the UK, the Financial Crimes Enforcement Network (FinCEN) in the US, or the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) just to name a few. In the UK for example, companies authorised by the FCA can be searched in the Financial Services Register

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