With interest rates so low a Spanish mortgage could be a good way for British property buyers to protect themselves against a weak pound.
The recent sharp fall in the GBP£ must be something of a headache for many British property buyers in Spain hoping to take advantage of prices which, although they’ve been on the rise in the best areas since 2014, are still well below the pre-crash highs of 2006/7. For those who haven’t already committed to a purchase it may seem a good idea to delay their purchase until the pound is stronger but they will, almost certainly, find themselves paying more for the property in 2017, wiping out the benefit from a more favourable exchange rate. The sudden change in the £/€ exchange rate may also be a problem for buyers who have already signed a private contract and are committed to completion of a purchase in the near future. Pulling out would result in the forfeit of the 10% deposit but completing the purchase may require thousands more £s than they had budgeted for.
In December 2015 the exchange rate peaked at €1.41 to the £; six months later, just prior to the E.U. referendum, it had fallen 10% to €1.28. Another 14% has come off since the referendum, to the low point earlier in October of €1.10. The harsh reality is that a buyer could have bought a €500,000 property in December 2015 with £355,000 while today they would have to exchange £445,000. Ouch! The last time we saw such a weak £/€ rate was after the 2008 global banking crisis when it fell from mid-2007 highs around €1.48 to a low of €1.10 in January 2009. I recall much talk then of parity but slowly the pound recovered and never went below €1.10 and it will be interesting to see if €1.10 is as bad as it’s going to get in this cycle.
The worst affected will be buyers who have a mortgage agreed at the maximum level and are unable to borrow additional funds. They will be faced with two stark choices, both unpleasant – either default and lose their deposit or allocate additional capital to make up the shortfall caused by the GBP£’s fall. However, there have been very few such buyers in the market in recent years, people borrowing to the maximum because they needed a mortgage. It’s a fact that the majority of British buyers in Spain since the crash have been cash-rich although, as interest rates fell, many chose to hold on to some capital and take a Spanish loan. They didn’t need one, it just made good financial sense and several clients of mine have done just that. My advice to current cash buyers would be to protect as much of their GBP£ capital as they can and take a Spanish mortgage for as much as they can get. At some stage in the future the £/€ exchange rate will be more favourable and they can lock in then.
Fixed rate mortgages disappeared in Spain after the financial meltdown in 2008 but have made a reappearance in 2016. At the same time, Euribor, the rate that sets the interest rate for the majority of bank loans in Spain, has been negative since February 2016 and shows no signs of an upturn in the short to medium term. Last week, a client of mine was given several options:
70% LTV at 2.5% fixed for 20 years, 2.10% for 15 years and 1.9% for a 10 year fix, life cover included. The broker says the majority of British applicants are taking the fixed term option, reasonably confident that they can invest the freed-up capital to equal or better the interest rate charged so early redemption charges aren’t an issue. For those who would prefer to pay off or reduce the loan in the short to medium term, say 3 – 5 years, a variable rate loan could be an option, current quotes of 1.75% above Euribor for 60% LTV and 2% above Euribor for 70% were given, assuming life cover is taken. Early redemption fees for variable loans are 0.05% in the first five years and 0.25% thereafter and it is possible to negotiate zero on partial overpayments.
So, if the bank are willing to lend why not take it and exchange your GBP£s when it suits you.