Mortgage loans in Italy and a residential financial analysis - Essay Example

Mortgage loans in Italy and a residential financial analysis This paper investigates mortgage loans in Italy and the residential analysis of that country, with a focus on legal issues and the time value of money / interest rates. It also shows the legal aspects of receiving a mortgage loan as well as a few facts on foreigners and what they must do. The paper also gives a general description of the value of money and how interest is factored into it. The role of real estate investment in Italy is becoming larger as it is becoming a better way of financial investment than it has in the past.1 Historically principle real estate investment was done by local investors while now there is more investment from non domestic peoples and parties.2 One of the main strengths of the Italian housing market is, according to a 2001 census, a very high rate of ownership which sits around 71% and the residences where people live account for about 60% of Italians net wealth.3 One of the advantages of getting a mortgage loan in Italy is the fact that the Euro, at the moment, is a very strong currency as this offsets the facts that the mortgage rate in Italy is a little higher than in the United States or England.4 There are legal issues that must be dealt with in securing a mortgage loan and owning property in Italy. A reservation must be signed once you have found a property that you would like to purchase which is a legally binding agreement that obliges both parties to complete the purchase of real estate by a specific date in an office of an Notary Republic.5 After the reservation is signed there is a mandatory deposit that must be put down which ranges from 10 - 30% which you do not return if you pull out of the deal but conversely if the vendor pulls out of the deal they must pay two times the amount that was agreed upon as the deposit. 6 When the real estate deal is completed the deposit is counted toward a down payment. 7 The buyer must state that the purchase of the property is conditional on the buyer receiving a mortgage, a satisfactory survey, and that the property in question is in compliance with building regulations free from all charges as the buyer must check what legal fees and local government taxes might be associated with the purchase before re-mortgaging or purchasing.8 The real estate deal is complete once this process is formalized by a sale deed written by a local notary who then registers the deed with the land registry as well as pays all the taxes incurred on behalf of the buyer.9 There are Italian solicitors that are available for much of this legal work as they generally charge 2% of the purchase price of the property as some of their duties include drawing up of contracts, contacting the relevant notary for such documents, payment of taxes and registering the property. 10 Notary fees differ on the price as they generally charge a higher percentage on less expensive properties as the average fee will be around 4% of the declared price of the property.11 Foreign citizens must also receive a tax identification number codice fiscale through any Italian financial office or an Italian Embassy.12 This document is important for: Signing the preliminary purchase agreement Requesting bank financing Opening bank accounts Concluding the final purchase agreement with notary Purchasing an automobile Arranging public utilities contracts Presenting declarations to public offices , whether communal, regional or state13 The time value of money is used as the base for all ideas in finance as it has a direct impact in business, consumer, and government finance as the time value of money derives for the concept of interest. In the terms of the time value of money one dollar today is the same value as a dollar in three years time but where it differs is the money that could be made by investment and gaining interest over a period of time from when you first receive the money. If you receive 10,000 dollars today you can increase the value of that money in the future. If you receive the same amount of money in three years time then you do not have the benefit of earning off that money in the three years. Depending on fluctuating interest rates it will depend how much you receive on your 10,000 dollar investment. On the next page is a simple illustration which shows both scenarios: 14 In terms of Italy and the housing market Italians are looking more to real estate as an investment something they had not done in the past. In the past ten years Italy has sought a more rigid fiscal policy to meet the standards that are set by the Economic and Monetary Unions and the country has benefited from relatively low interest rates, in terms of the Euro zone, and the current administration has implemented many short-term reforms that's purpose is to improve Italy's competitiveness and the country's growth in the long term.15 Italian mortgages are different in some respects to those in the United States or even England, while the principles remain the same as if you default your property can be repossessed there are some differences. The biggest difference is in the interest rates. The base rate for interest rates in the Euro zone has hovered around 2% for the last year a slight increase to the United States which is around 1.75%. 16These figures, much like most aspects of any financial market, fluctuate but the economies within countries of the Euro zone are not likely to increase dramatically. Traditionally Italian homeowners own their properties for long periods at a time and, generally although it is changing, do not use their property as investments and speculations and Italians traditionally have paid for their properties in cash rather than by financed mortgages.17 In the regulations of mortgage lending in Italy it is subject to practical regulation and is subject to laws and rules that are based on government financial contracts.18 In Italy financial institutions that offer their services must abide by rules that are designed to make sure all information is given to the buyer before any contact is signed.19 Mortgage lending in Italy is covered by general regulations and the contract must include an indicator that shows the yearly cost of the mortgage that shows interest charges, cost of inquiries, and any cost for preparing relevant documents and administration.20 The contract also must show the amount of costs that the borrower must pay in case repayment is made early.21 Mortgages in Italy usually are had for 80% of the purchase price of the property and usually means that a deposit of 20% is needed as well as documents that prove your personal income and assets as self certification mortgages are usually not available.22 Mortgages in Italy are for 5 to 25 years and the financial institutions that lend the money do not factor rental income when they value how much a buyer plans to borrow as, in Italy, the amount is correlated to 30% of the buyer's monthly income.23 In recent occurrences in the residential financial analysis the housing market in Italy increased sharply beginning in 2000 and have increased every year since at an average of 8% but as indicators have shown it does not lead to overvaluation and more so there is little evidence to support it. 24 The Italian housing market, despite its recent growth, is still considered small by international standards.25 More than 75% of credit for purchasing homes is variable rates as there is only a small portion of lending has fixed rates which are at or over ten years.26 Even though banks make up the majority of mortgage loans in 2004 Italian post offices started to grant such loans.27 Direct purchases of property whether it be by phone or the internet is only a small portion on the real estate dealings considering that by Italian law the purchase contract must be viewed by a notary. Even though Italian real estate is small by international standards it is growing and banks are granting more loans as Italy sees the value of the real estate market as an investment which is something they have not done in the past. There are many regulations and laws especially by third parties such as notaries. In terms of the Euro zone the Italian market is an attractive one to purchase property considering the relatively low interest rates. Annotated Bibliography 1. http://www.fma.org/Siena/Papers/880367.pdf PDF paper Claudio Poritzo Gabrielle Sampagnero "Real Estate Investments: The Case of Italian Market 2. http://www.bis.org/publ/wgpapers/cgfs26gobbi.pdf PDF paper on Housing Finance Italy 3. http://www.lifeinitaly.com/real-estate/Mortgage.asp Website dealing with loans in Italy 4. http://www.spf.co.uk/9.4.html Website with information on Italy real estate, loans, legal issues 5. http://www.seemoney.co.uk/pages/offshore/international_mortgages_italy.asp Website with information on buying property in Italy, especially foreigners 6. http://www.lifeinitaly.com/real-estate/buying-in-Italy.asp Website with information on buying real estate in Italy 7. http://www.investopedia.com/articles/03/082703.asp Website with information and graph on time value of money 8. http://www.cia.gov/cia/publications/factbook/geos/it.html#Econ CIA fact book with information on the Euro zone and Italy's competitive growth 9. http://www.keyitaly.com/article/mortgages/ Website showing Italy's interest rates and information on Euro zone rates 10. http://www.seemoney.co.uk/pages/offshore/international_mortgages_italy.asp Website with information on buying property in Italy Read More