Italian mortgages – April 2019 white paper

Americans Need Less Cash to Buy an Italian House

In this article we outline the current Italian mortgage market, focusing on American borrowers who want to finance their purchase of an Italian property.

This article includes:

• Brief Overview of Global Dynamics affecting the Italian Mortgage Market
• Italian Mortgage Market as applies to Foreigners
• Italian Mortgage Institutions’ Terms, Conditions and Requirements
• Mortgage Options
• Conclusions

“Italian banks offer U.S. borrowers the option to choose between a loan in euros or in U.S. dollars”

Global Dynamics

As a result of the 2007-2008 credit crunch, Italian mortgage policies got much stricter. Obtaining a mortgage became more difficult, especially for non-Italian residents. Then, in 2014 it got even worse for Americans when the U.S. passed the Foreign Account Tax Compliance Act (FATCA), which requires that foreign financial institutions report to the U.S. authorities any foreign assets held by their U.S. account holders.

Therefore, many Italian banks stopped dealing with U.S citizens until they figured out how to satisfy the new FATCA compliance rules.

Italian Mortgage Market for Foreigners

Over the past two years the market has settled and we have seen positive changes.

“Our U.S. clients have seen an 82% increase in Italian mortgage approvals compared to 24 months prior.”

It is important to note, however, that there are still very few Italian banks that are prepared to give a conventional mortgage loan to a non-Italian resident. The banks that are providing mortgages to non-Italians have been able to develop a sustainable system which acknowledges foreign-earned income. This income can then be used to support an Italian mortgage application that satisfies the compliance rules set out by the Bank of Italy and the European Central Bank.

In 2018 and the first quarter of 2019 we observed positive results from new Italian banking polices delineating mortgages for non-Italian residents who want to invest in Italian real estate. Banks and lenders still apply significant restrictions compared to the terms offered prior to the last credit crunch, such as lower loan amounts. However, U.S. investors finally have an easier way to finance their “dream” and profit from incredibly low interest rates, especially in comparison to the rates in their home country.

“U.S. borrowers can get an Italian mortgage with an interest rate as low as 1.70%”.

Italian Mortgage Terms and Conditions – Commonalities

Mortgage terms and conditions change along with the global and local (Italian) financial climate, which means they are rather unpredictable. However, based on the expectation of continuity with the recently observed financial dynamics, the Real Estate department of our office has outlined the most common Italian mortgages preferred by our U.S. clients.

Nevertheless, it is important to note that many of the findings in this white paper apply also to borrowers we have assisted from other countries, such as Canada, the UK and countries of the European Union.

For the purposes of this white paper, we have conducted a review of mortgage deals recently closed on behalf of our clients. We have also interviewed several bankers and mortgage brokers experienced in providing loans to non-Italian residents and have heard their opinions about future expectations; in compliance with regulatory rules this report does not include any names of banks or brokers. We then focused our review on the borrower profile of U.S. citizens, living in the U.S. or in Italy.

Through our research we have identified some similarities and some differences between the offers of Italian mortgages for non-Italian borrowers.

As a common standard across institutions, we noted that mortgage loans for non-residents are offered with a repayment plan of a maximum 20 years. This is a shorter term than what the institutions are offering to domestic borrowers, where a 30-year repayment plan is often the norm.

Also, across the board we found that mortgages for non-residents have a Loan To Value (LTV) ratio, lower than the LTV offered to Italian residents. The LTV is a standard industry ratio that depicts the relationship of a loan amount with the value of a property. It reflects the loan sum divided by either the property’s sale price or the property’s appraised value, whichever is less. However, some Italian banks, after a year of two of on-time mortgage payments, also offer the option to do a personal loan on top of the mortgage loan.

Italian Mortgage Terms and Conditions – Differences

With respect to the differences, we have identified three main mortgage offer options depending on where borrowers live (in the U.S. or in Italy), the currency of the loan (U.S. dollar or Euro), the applicable rates, the duration of the loan and the involved bureaucratic formalities.

For example, one Italian bank has a mortgage product specifically designed for U.S. citizens earning their income in U.S. dollars. More specifically, this bank, when dealing with a U.S. resident, will only offer a loan in U.S. dollars. This product has been developed to eliminate the risk of default due to unfavorable currency fluctuation.

Other banks offer U.S. borrowers the option to choose between a loan in euros or in U.S. dollars. Still other banks only offer loans in euros. For each U.S. borrower it is important to know these options exist and understand which option is most beneficial to his personal borrower profile and financial goals.

As to interest rates, they are linked to the European Central Bank interest rate parameters. This makes Italian mortgage rates remarkably lower than U.S. interest rates. In particular, a U.S. resident can get an Italian mortgage to buy an Italian investment property (for example, to use it for a short-term rental business), for an interest rate of a third, or even less, as compared to interest rates currently applied in the U.S. to buy a U.S. investment property.

As to the processing and closing formalities, usually Italian banks have a limited team of people dedicated to this kind of mortgage loan. Although they agree to finance the purchase of properties throughout the entire territory of Italy, some banks will require that closing is signed in a specific location, where their “international loan team” is located: this is usually Rome or Milan. This might create some difficulties when the property owner is not prepared to go to one of these locations to sign the sale agreement, which is always required to be signed at the same time as the mortgage contract.

Other banks have adopted the unilateral mortgage contract template, which enables a borrower to sign it anywhere in Italy.

There is a certain degree of personalization and adaptation for each mortgage, depending on the specific profile and needs of the borrower, such as financial status, marital status and the specific profile of the  property to be financed. Therefore, a virtually unlimited number of combinations of mortgage specifications, terms and conditions do exist. The key for any U.S. borrower is to know what is available from which institution based on the specifics of his borrower profile and the property itself.

Conclusions

This report has been prepared for internal use by the firm’s Real Estate department as a baseline and general overview to better assist our foreign clients who wish to invest in Italian real estate using the financing leverage of an Italian mortgage. We are happy to share this top-line summary of our conclusions:

• Mortgage Approval Rate: 82% higher compared to 24 months ago
• LTV: 50%-60%
• Interest Type: adjustable and fixed
• Interest Rate: 1.70% – 3.60%
• Loan Currency: EUR or USD
• Repayment Plan: 10 to 20 years

For ease of reference, we have put this information in chart format.

In conclusion, one common rule applies to all cases: before committing to a mortgage contract a borrower should take into consideration all available options under the specific property purchase terms and his/her personal and financial conditions. We have worked on hundreds of international property transfers and we are happy to share our knowledge and experience. Contact us to discuss specific situations and personal case scenarios.