A franc look at your mortgage

If you are one of the thousands of people returning from holiday harbouring dreams of owning a second home in the sun, there are a number of things to consider before taking the plunge. There are a variety of options for financing the purchase and lots of people you should be talking to before you get anywhere near to signing on the dotted line.

A range of factors have converged to make this one of the best times ever to buy a property in Europe. Sterling is still very strong - it is currently just under 10 francs to the pound - while interest rates on the Continent are significantly lower than over here. The typical variable mortgage rate in Spain is around 4.6% compared with 6.85% in the UK.

And, with property prices shooting up in many parts of the UK, people are discovering they are able to get a lot more for their money when house hunting on the Continent.

"In many European countries, France in particular, if you shop around you can get quite a good deal. Prices have not shot up to anywhere near the extent they have in the UK," says David Wells at Abbey National.

Some people will have enough equity in their home to be able to remortgage their UK property and use the money to buy the second home outright. However, for many, taking out a mortgage denominated in the currency of the country concerned will be tempting because of the lower interest rates. Remember, though, that if the exchange rate changes, the monthly cost will vary.

There are a number of major lenders offering mortgages to people buying second homes on the Continent, plus specialist firms such as Conti Financial Services, an overseas mortgage broker based in Hove, East Sussex, which arranges loans in 21 countries.

Abbey National offers foreign currency mortgages to people buying homes in France and Italy, and loans denominated in sterling for those buying in Spain and Portugal.

When it comes to France, Abbey's interest rates start at just 3.65% - this is a variable rate that is reviewed quarterly. However, you will need to stump up a deposit of at least 20% of the purchase price. The loan is denominated in francs and there is a minimum loan term of seven years and a maximum of 20 years. For those looking to buy in Italy, Abbey's deals include a rate of 4.3% fixed for two years (after which you go on to a variable rate or another fix).

The Woolwich's variable rate deals for people buying in France range from 3.9% for people with a 40% deposit to 4.2% for those who can only manage a 20% deposit. The loans are denominated in francs.

For those purchasing a property in Spain, Royal Bank of Scotland has a variable rate deal at 4.5% (denominated in pesetas).

Norwich & Peterborough Building Society offers sterling mortgages to people buying homes in southern Spain. It charges a variable rate (currently 7.5%) which is reviewed monthly. A spokeswoman says the typical customer is aged in their late 30s or early 40s and is buying a terraced town house with a communal swimming pool for around £70,000, or a detached villa with its own pool for around £108,000. The average size of mortgage is £63,500. N&P will only lend up to 65% of the purchase price.

In France, the most desirable areas include Pas-de-Calais and the Dordogne. But the Eurostar and Le Shuttle services and the growth in cheap flights have helped make people a lot more adventurous.

"The British, in particular, are far more knowledgeable now than they ever used to be. They are travelling around France much more and they are discovering areas for themselves that once upon a time they would never have heard of," says Frances McKay at Francophiles, a Maidstone-based company specialising in French property.

The number one piece of advice for anyone considering buying abroad is to take your time - don't rush into anything. Visit the property more than once, preferably at different times of the year, and get to know the area well. Take the opportunity to compare prices, check out the local amenities such as shops and medical facilities, and ask the neighbours about the pros and cons of the area.

You may be buying a holiday home but don't let the sun addle your judgment. Follow the same general principles you would if you were buying a property in the UK. Talk to your mortgage lender - they may be able to offer you practical help - and get proper independent legal advice.

Buying a property on the Continent can involve significantly higher costs than it does in the UK. In France, Spain and Italy these costs can add 10%-15% or more to the price you pay: that could mean £12,000 in the case of a £80,000 property.

In France, a big chunk of this is the fee you pay to the notary (le notaire), the person who usually handles the conveyancing for both the purchaser and vendor. He or she will typically charge 8%-9% of the loan amount for older properties. Then there are the estate agent fees which can range from 4% to as much as 12%; the cost of the mortgage deed (typically 1%); and perhaps an arrangement fee of 1%.

Enjoy the property as a holiday home first and view it as an investment second. "Property prices have not really gone up a great deal in France over the last six years - they have been fairly static. However, they are starting to stir a bit at the moment," says David Wells.

If you have set your heart on a property because of its stunning, unspoilt views, it is essential to find out whether any development is planned or would be permitted that would ruin your glorious vista, says Norwich and Peterborough.

Bear in mind resaleability - it may well be an idyllic setting, but if the property is in the middle of nowhere this may restrict its marketability.

Ray Boulger at mortgage brokers John Charcol reckons that for most people buying abroad, it makes sense to borrow in the currency of the country concerned.

If the currency increases in value then both your debt and your asset will move the same way.