Euro mortgage

sarahmichael

Hello.... Is there anyone who can advise what I should do about a mortgage I have for a property in Spain ( in euros) please.
What was a 68k euro mortgage is now a 100k euro mortgage because of the £ to € rate.
I have been considering options 1) raising a £ mortgage here 2)selling 3) hold.
I would love to hear some expert advice..... thanks:money:

97trophy

Hi I am not quite clear.

The mortgage itself is in EUR right?

Is the income you are using to pay the mortgage in EURs or GBPs?

sarahmichael

I transfer GBP from here to the bank there!

TonyMMM

Difficult situation - if you raise a mortgage here (for the 100k you will need to clear the Euro mortgage) you are effectively "locking yourself in" at the current exchange rate. Might be an OK idea if rates continue down, but if the £ recovers you will be even worse off very quickly.

Illustrates the problem of having borrowings in a currency you don't have your income in - you are completely at the mercy of exchange rate movements.

Selling the property (if you can) would generate Euros so might be the best option.

gfplux

sarahmichael wrote: »

Hello.... Is there anyone who can advise what I should do about a mortgage I have for a property in Spain ( in euros) please.
What was a 68k euro mortgage is now a 100k euro mortgage because of the £ to € rate.
I have been considering options 1) raising a £ mortgage here 2)selling 3) hold.
I would love to hear some expert advice..... thanks:money:

Hello sarahmichael,
I see that you are suffering an approximate 30% drop in the pound to euro. However if you sell you can take "advantage" of the euro's STRENGTH against the pound.
For example if you paid €100,000 for your property the cost in pounds was say £62500 (at €1.60 to £1.00) now it's original cost is £89286 (at €1.12 to £1.00) so you could "afford to sell it for €70,000 which would give you £62500. This is without fee's and also if you can find anyone in the world who wants to buy property in Spain.

devils_advocate

gfplux wrote: »

Hello sarahmichael,
I see that you are suffering an approximate 30% drop in the pound to euro. However if you sell you can take "advantage" of the euro's STRENGTH against the pound.
For example if you paid €100,000 for your property the cost in pounds was say £62500 (at €1.60 to £1.00) now it's original cost is £89286 (at €1.12 to £1.00) so you could "afford to sell it for €70,000 which would give you £62500. This is without fee's and also if you can find anyone in the world who wants to buy property in Spain.

Unfortunately this notional translation of selected amounts doesn't quite work.

The OP's problem is that they have various currency mismatches, and as I dont have full informatrion I'm going to make some assumptions to illustrate.

the first assumption is that the 68k euro mortgage is actually £68k, which was the sterling equivalent of a €100 K mortgage. This has now become a £100 k mortgage, assuming an exchange rate of 1:1.

The next assumption is that the property cost more than €100 K. I don't know this amount, so I'll assume it cost another €50 K., which was historically £ 34K, using the same exchange rate.

So the purchase of the house has two elements, the purchase of the €equity with £ cash. This was at an exchange rate of about 1.47, and was locked in at that time.Assuming no movement in house prices, the op has made a gain, as this Euro asset is now worth £50 K., instead of the original cost of £34k.

The rest of the €equity was purchased with a €mortgage, so these are perfectly hedged and the op has no fx exposure to Sterling. However this is not the only part of the situation, as the €mortgage can be further split in two, the capital element and the interest element. The capital element matches the house asset, but there is an accumulating €interest element which is not being hedged by a corresponding €asset. and this is where the OP has a further Fx risk, as he is having to pay this €interest from £ cash. This is an Fx mismatch which is becoming painful for the op at the moment, as it takes more and more £ cash to pay the €interest. There may also be a capital repayment element which increases the mismatch.

The current house price crash shows the difficulties in financing any capital assets from borrowing, as the asset itself may decline in value, and the borrowing amount stays the same. The situation that the OP find themselves in here is further complicated by the various Fx exposures, and as can be seen from the above analysis there are a number of variables, any one of which can move in the op's favour or adversely.

Its therefore the OP's decision as to what elements of risk they wish to accept, and which they wish to mitigate. For example, servicing a €loan out of £income may be acceptable if they can easily afford increased repayments (if interest rates remain the same, and the currency appreciates by 30%, it's exactly the same as the currency remaining the same, and the interest rate increasing by 30%). However, if there is not much spare £ income, the OP may wish to mitigate this risk by selling the property and avoiding having to service such loan.

I suspect that the only certainty is that the op didn't carry out this sort of analysis of risks prior to making the purchase!

Trollfever

A gentle bump.


.

sarah_elton

Is it possible for you to rent the property out, or does someone live there?

If you could rent it, and get the rental income paid in euros, you could use that to pay the mortgage and be protected from currency moves.

_bankrupted

sarahmichael wrote: »

Hello.... Is there anyone who can advise what I should do about a mortgage I have for a property in Spain ( in euros) please.
What was a 68k euro mortgage is now a 100k euro mortgage because of the £ to € rate.
I have been considering options 1) raising a £ mortgage here 2)selling 3) hold.
I would love to hear some expert advice..... thanks:money:

I am in the same situation.

My advice (see an earlier post in my name for more details) is not to raise a sterling mortgage here. Doing so will lock in this poor exchange rate.

There are several outcomes with regard to the exchange rate.

1) Stering is probably at its weakest, I think it's unlikey to weaken further
2) Spain could leave the Euro, (unlikely) but it's being hit extremely hard by this recession and ECB policy does not help
3) ECB rates will probably fall below that of BOE as UK leaves recession.

Basically the pound is being manipulated by the UK Government to weaken it so as to help UK industry. Something that the ECB cannot do

Here are some some examples of the disparity that we now have due to the deliberate UK stance of devaluing the pound.

The latest Nokia N96 £480 against €689

http://shop.nokia.co.uk/nokia-uk/product.aspx?sku=3879523&culture=en-GB&cp=localbuynow&pp=n96fnc

http://www.elcorteingles.es/multitienda/producto/producto.asp?tpam=scc&cpam=24&hddref=84892

With such disparity the situation cannot last forever when we are equal trading partners in the Eurozone. You could book an Easyjet return flight Madrid-London for 60 Euros buy the phone and still have paid 150 euros less than in Spain. Or even easier order it over the internet.

As soon as UK PLC has benefited from the weak pound and the recession is nearing an end, UK rates will rise rapidly and I predict that Eurozone will still be in recession and hence maintaining low rates.

Bf109

_bankrupted wrote: »

As soon as UK PLC has benefited from the weak pound and the recession is nearing an end, UK rates will rise rapidly and I predict that Eurozone will still be in recession and hence maintaining low rates.

How are we going to benefit from the collapse in Sterling?

We have the biggest trade deficit in history. We import most things and export very little. A 30% fall in Sterling means a corresponding rise in inflation, just waiting to clobber us all. Thats when rates will rise sharply. We wont see any benefits from this. Either before, during, or after

GDB2222

Bf109 wrote: »

How are we going to benefit from the collapse in Sterling?

We have the biggest trade deficit in history. We import most things and export very little. A 30% fall in Sterling means a corresponding rise in inflation, just waiting to clobber us all. Thats when rates will rise sharply. We wont see any benefits from this. Either before, during, or after

We do still have a few export industries. We will eventually benefit from import-substitution.

Just as importantly, this is going to be great news for our tourist industry. People may take their holidays in the UK, rather than abroad.

In the LONG run, lower Sterling is great news!