The European Union (EU) is a good thing. Really, it is. True, it's given us a bit more bureaucratic red tape, the Eurovision song contest and a few enraged French farmers, but on the whole, it's a pretty nice set up. We can travel to 25 different countries, live and work in any of them, buy houses in them and generally come and go quite freely without a visa. Try and sort out your finances in another European country, though, and you could be in for some serious culture shock. Take overseas mortgages, for example. Buying houses abroad is probably one of the biggest purchases most of us will ever make in our lives and with thousands of British people moving to countries in Europe every year, you'd think it would just be a case of searching for the best overseas mortgages and then sitting back to enjoy the view. Not so, say reports from the European Mortgage Federation (EMF) and the UK Consumer Group. Both have highlighted the need for a more open, consumer-friendly banking and overseas mortgage market.

Judith Hardt, Secretary General of the EMF, told a political monitoring service, "Today, overseas mortgages are regulated by national law and it is very difficult to standardise them because it is embedded in civil law". This means that if Brits assume that they're protected by British laws while buying in another country, or if they fail to research the differences between banking at home and abroad, they could face huge financial losses. How, then, is it possible for Europe's financial service market to be so unregulated while everything from currency to criminal law is being integrated by the EU?

One big reason is the EU's own Internal Market Commissioner, Charlie McCreevy. While he announced in early 2005 that the EU mortgage market in particular, worth four trillion euros, needed shaking up, he was reluctant to concede that more legislation was the answer. As far back as 2003, a forum group on mortgage credit had been set up by the EU Commission to investigate why cross-border loans accounted for only one per cent of the entire market. Prior to this, the only banking guidelines came from a code of conduct signed by the 3,600 finance institutions across Europe. This was a voluntary code, however, and a study by the German Institute for Financial Services (IFF) showed that in reality there was very little compliance.

Market minefield
For those about to acquire an overseas mortgage and for mortgage providers trying to enter a foreign market, according to the EMF, there are several major problems. Tax differences found in each country means there is discrimination against foreign lenders and customers, keeping people restricted to national products. Loan transfers have also been debilitating, where costly charges or harsh conditions are placed on consumers. While difficult to measure accurately, mortgage transaction costs between European countries is still important, ranging from around 17 per cent in Belgium, down to below two per cent in the UK.

Additionally, government intervention is not uniform across all countries. Simon Conn, of Conti Financial Services, a company that specialises in overseas mortgages, calls the EU mortgage market a minefield. Pointing out the difficulty of a one-size-fits-all mortgage market, Conn says, "there are over 4,000 types of mortgages in the UK, while the Bank of France standardises all its mortgage lenders. The constraints just aren't the same." Cultural differences go in some way to explain the disparity: varied debt expectations and needs, like the age each nationality tends to leave the parental home and buy their first property, affects finance strategies in a country.

Language barriers
Conn also brings up the problem that many people take for granted the fact that paper work will be provided in English. Goretti Hernandez-Garcia has encountered this problem many times when she worked as a liaison for non-Spanish speakers in the Canary Islands. She believes that when taking out overseas mortgages in Spain, British buyers think that they have instant rights, such as compensation, redress and, specifically, the same level of protection they might experience at home. "Even with British mortgages these things aren't automatic rights, but in a foreign country this is doubly so", Hernandez-Garcia warns.  "I've had clients complaining because their mortgage has been mis-sold but there is no official process to lodge a complaint. Or others who literally cannot read their own paperwork, they can't do anything... it can be very frustrating for them".

Intergration inertia
Faced with such a tangle of national laws, numerous  financial pot-holes and miscommunication, the EU Commission might appear to be moving somewhat slowly on the issue of overseas mortgages. There can be no denying the push for tighter regulation and an opening of cross-border competition has been resisted in some quarters. When McCreevy initially proposed plans to open the EU financial services market, Gerhard Schröder, at the time Chancellor of Germany, tried to have them thrown out or watered down significantly in order to protect German financial providers.
 
Predictably, a high proportion of finance industry professionals were also not encouraging in their response to the proposals. The European Association of Public Banks sees any change to the current voluntary self-regulation pushing up prices with few benefits for the public or national economies. An unexpected source slowing integration is the low level of profitability of mortgages in some countries. Mortgages are sold at a loss with other products, such as insurance or credit cards, making up the profit.
 
A more harmonised approach to EU financial services might conceivably benefit Europe in creating a larger market as opposed to 25 smaller, fractured ones, but what would more pan-European regulation and integration of financial services mean for you as a property owner or buyer abroad? The Forum Group addressed the issues of consumerconfidence, cost and benefits of a more integrated financial market, and the obstacles that prevented more coordinated banking policies. Largely, the Forum Group called for better customer orientated financial products. As McCreevy told The Guardian in February 2003, "in this era of new technology and growing use of the internet there's no reason why you should not be able to access the best deals".

Simply flooding the market with thousands of products just creates an information overload. Instead, the report suggests, the ability to compare and contrast different financial services should be possible. This would be achieved by creating an EU-wide Annual Percentage Rate of Change (APRC), which includes a European Standardised Information Sheet (ESIS), listing all cost related information, such as the cost valuation, repayment fees and mortgage registration. The group wanted binding consumer protection laws so all Europeans are covered, or at least partially covered, by similar mechanisms and structure regardless of residency.

Which law – the mortgagee's country of residence or the location of the property – ideally must be set out clearly for customers before any contract is signed. In EU member states, especially the Mediterranean, 'hidden mortgages' and inherited debt on properties are a nightmare for those unaccustomed to such convoluted property laws. Such mortgages don't appear in the mortgage registry and you, when buying the home, can't check if a property is already being used as collateral for a loan. The EMF sees the abolition of these kind of risky, unethical practices as a step forward for all EU mortgage consumers. However, it's not all bad news if you're getting a mortgage with a foreign lender. The emergence of another trend among British property owners, the buy-to-let market, has been aided significantly by the introduction of the euro.

Spain, a British favourite since the 1960s, had around 75,000 people buying houses there last year alone. This in itself has prepared the Spanish banks and lenders for foreign buyers, despite the occasional horror story. In France, the second most popular destination for British homebuyers, there is a safeguard for those trying to take out mortgages. If the buyer has a mortgage application refused three times by a French bank, there are no financial penalties for withdrawing from the sale.

If investing in a buy-to-let property, it is important to consider which currency you want: sterling loans, where interest rates are based on UK levels and repayments are in pounds; or foreign currency loans where rates are set in the country concerned and repayments are made in the local currency, be it euro or Bulgarian lev. With overseas mortgages, you will generally need around 25–30 per cent of the property price as a deposit. Many apartment complexes in Spain demand 40 per cent up front. Although there is no currency risk with sterling based mortgages, they tend to be more expensive and fewer lenders provide them.
While in the UK there are a high number of different mortgages, Belgium, Germany, France and the Netherlands are countries where fixed-interest rates are dominant, while in other markets, such as the UK and Spain, variable rates prevail.
 
So far so good, but all the countries mentioned have been in Europe for at least ten years and are relatively familiar to British homebuyers and property developers. In Eastern Europe, EU accession has sent Brits flocking over to virgin investment territory. But in the furore to get a bargain further afield, many forget that the countries' legal and property ownership systems have languished for years under Communist rule.

Conn singles out Croatia for poor infrastructure. "There's no legal organisation or government body regulating ownership. No one knows what they're doing or who owns what." There are some extra precautions to be taken if you do  decide to take out a mortgage overseas. Conn suggests that it's important to open a bank account in your chosen country and make sure you get a Certificate of Importation for the money you bring in from your home country. Make absolutely sure you don't inherit a debt on the property before you purchase by employing a solicitor to check that the developer hasn't borrowed money to build the development and this amount has been allocated against each plot as additional security to the bank. Obviously, the language barrier is a definite hurdle: to avoid headache hire independent solicitors, architects and surveyors proficient in your chosen country's language, laws and processes, and who also know the specifics involved in buying a property there.

Country profiles
The EMF, in a review of European mortgages and housing market, has mentioned a few countries making the most of the rising house prices and interest rates that have almost halved in the last decade. Proving that their homes really are their castles, Britain has overtaken Germany to become Europe's largest mortgage market, with 1.2 trillion euros worth of loans outstanding, almost a quarter of all EU mortgage balances. At the last count there were 30,000 financial products available on the British market.

The smallest national market for mortgages in the EU is in Slovenia. Mortgage lending outstanding in the Eastern European member was 387 million euros. House prices in Malta, France and Spain all benefited from a growth spurt in 2004 and are expected to remain in a good shape for 2006. Belgium, Denmark, Ireland and the UK also experienced significant house price growth of around 11 per cent. Conversely, Germany and Austria have seen negative house price growth. Not the first country that springs to your mind, perhaps, when it comes to the business of property markets, but the Lithuanians seem to have it sussed: home ownership is the highest in the EU at 98 per cent.

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Article first published in March 2006