Family OfficeFinanceMortgagePropertiesRiskWhy do banks only finance mortgages for real estate in their own country and not for the purchase of real estate abroad?

31 January 20240

We are often and frequently asked this question in our work as consultants:

Why do banks usually grant mortgages only for properties within their own country and not for properties in other countries?

This question is particularly important for investors and individuals who wish to diversify their real estate portfolio or who plan to move to Italy and beyond. Understanding the reasons behind this restriction is crucial to understanding how banks think and to making investments in a calm manner with minimal risk.

Regulatory framework and legal jurisdictions

Different legal systems: each country operates under its own legal framework governing property rights, land registration, and financial transactions. Banks are primarily regulated by the laws of the country in which they operate. Providing financing for real estate requires an understanding of another country’s legal system, which greatly increases complexity and risk.

Regulatory compliance: banks must comply with the requirements of their own country. Real estate management also involves compliance with the country’s regulations, which can vary widely. This includes compliance with money laundering laws, tax regulations, and financial reporting standards.

Risk management: when it comes to lending for the purchase of real estate, there are risks involved. These risks stem from factors such as exchange rate fluctuations, political instability, economic changes, and unfamiliarity with the real estate market. Banks usually prefer to operate in a stable environment because they tend to be risk averse.

Economic and market considerations

Market understanding and property valuation: banks rely heavily on property valuations to provide mortgages. However, the valuation of properties in different countries can be quite challenging due to lack of market understanding, differences in property standards, and variations in economic conditions.

Guarantees: in case of default, enforcing a bank’s rights to a property located in another country can be more complex and costly. Legal proceedings in different jurisdictions can often be lengthy, costly, and unpredictable.

Currency risk: mortgages involve long-term commitments, which means that currency exchange rates can fluctuate significantly during this period. This poses risk to both borrowers and lenders in terms of the amounts to be repaid and the value of collateral.

Operational and strategic focus

Emphasis on domestic markets: banks typically focus on meeting the needs of their own markets. This focus is in line with risk management policies and overall business strategies.

Operational constraints: to initiate real estate financing transactions, banks need to allocate resources, including local expertise, legal advisors, and specialized staff. However, for banks, the cost of resources may not be justified.

Alternatives and solutions

Of course, for those who want to purchase real estate abroad there are various alternatives such as; Rent to Buy, Credit Lombard, real estate leasing, purchase with reservation of title and others

Conclusion

In summary, the reluctance of banks to finance mortgages for real estate abroad can be attributed to a combination of factors such as legal regulations, economic considerations, and operational challenges. Although these factors pose a difficulty, it is critical for real estate investors to understand them in order to plan and make effective decisions. Alternatives to a mortgage must be evaluated carefully, considering the associated risks and benefits.

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