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British buyers and the weak £

Spanish mortgagesWith interest rates so low Spanish mortgages 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.

Taking a look at the Spanish mortgages on offer may be the solution. 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 2019, 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.

The Highs and the Lows

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 16% has come off since the referendum, to the current low  of €1.07.  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 £467,000.  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 how low it’s going to go in this cycle.

The worst affected will be buyers who have Spanish mortgages 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.

The Fixed Rate Solution

It’s a fact that the majority of British buyers in Spain since the crash have been cash-rich.  However, 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 Spanish mortgages disappeared after the financial meltdown in 2008 but made a reappearance in 2016.  They now account for about 40% of all new loans in Spain.  The majorty of British buyers are choosing the fixed rate option over variable loans.  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 a major upturn in the short to medium term.

So, if the banks are willing to lend why not take it and exchange your GBP£s when it suits you.  We are happy to put our clients in touch with a highly recommended mortgage broker who has worked with many former clients.  For more on current prices, this Blog covers the IMF warning and my concerns about new-build prices.

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