Property: Why the euro may bring a bonus for home-buyers

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Interest rates within those countries about to embark on the single currency adventure are dramatically lower than those in the UK.

So when we join, mortgage rates will plunge, right? Quite possible, says Clifford German , but house prices will not soar.

Comparing property prices in sterling and euros is the least of the questions facing property-owners in the UK if and when we join. At present the euro's forerunner, the ecu, is worth about 68p and the pound about 1.48 ecus. It is generally assumed that the pound is uncomfortably strong at present and after the last government's harrowing experience inside the ERM where the pound was overvalued at the start, any future government would want to see sterling weaker before it is switched into euros. But whatever the eventual rate at which the transition is made, valuing UK assets in the common currency should be a straightforward process.

The impact on UK mortgage rates is likely to be much more important. UK interest rates are currently as much as 3 points above equivalent French and German rates, and UK rates are more likely to converge on European rates rather than the other way round.

It may well be another five years before a referendum is held to test public opinion and at least seven more years before we could adopt the euro, but if it does look like going ahead it is in everyone's interest that interest rates converge well before the actual point of entry.

At least half of today's home-owners will have moved home by then, but most of them will still be making monthly payments on their home loans so mortgage rates are a matter of real concern and interest to most property owners.

Fortunately there is plenty of scope these days for borrowers to switch from fixed rates to variable rates of interest on their mortgages or vice versa, and to move their mortgages from one lender to another without actually moving home. But some recent research for Barclays Mortgages shows that 29 per cent of a sample of 900 people aged 20 and over would still look a standard variable rate mortgage if they move house. That means almost one borrower in three is still unaware of the attractions of discounted rate mortgages, cashbacks and various forms of fixed-rate mortgage.

Another 27 per cent would look for a cashback on their new mortgage, and another 18 per cent would be attracted by a discount rate in the early stages of their new loan, usually for 12 months, sometimes spread over two or three years. Those should be irresistible bargains for borrowers who are willing to tie themselves to their new lender.

But these days most if not all cashback and discount-rate loans require borrowers to stay with the same lender after the incentive rate has lapsed, and pay standard variable rates for up to five years.

They usually impose substantial penalties for early repayment - usually within five years of taking out the loan, including the repayment of the cashback in full, or up to six months interest on discount mortgages (unless they move house and take out a new loan with the same lender, although this is usually at the standard rate). If the discounted rate is stretched out over more than one year the penalties can apply for even longer.

A further 25 per cent would consider a short-term fixed rate, which even now in the week when more and more lenders are lifting their standard variable rates to 8.7 per cent there are plenty of fixed-rate offers that could cost them as much as 2 per cent less than the standard variable rate. Once again however most of these bargain fixed rate offers commit the borrower to staying with the same lender for some time after the fixed rate ends and reverts to the standard variable rate.Another 22 per cent are willing to take out mortgages at rates fixed for anything from five to ten years. Many of these borrowers are over 40s who are attracted by the prospect of a fixed repayment rate at today's mortgage rates, which are low by the levels of the last 10 to 20 years.

Some of these longer-term fixed rates incur no penalty for early repayment, but many of them do effectively lock borrowers in for the full term, and if the UK does join the single currency those rates could start to look quite expensive.

Looking further into the implications of a single currency, many borrowers are already asking what effect a euro-mortgage would have on property prices. On past experience a secular trend to lower interest rates, reducing the monthly cost of servicing a loan, should encourage borrowers to bid up property prices. But UK property prices are already relatively much more expensive as a percentage of average earnings than they are on the continent, and it is hard to see how the differential could justifiably widen further. In fact a significant number of our sample think a euromortgage would make it easier for them to up sticks and work on the continent. That might be a kind of wish fulfillment, but emigration of a significant scale reducing the demand for UK property cannot be ruled out.

It is also worth noting that the once irresistible rise in the proportion of home-owners in the UK has stabilised around 66 per cent over the past eight years, and it is now much more trendy to rent a home than it was when most tenants lived in council houses. That has reduced demand for owner occupation and helped to keep property prices down since the Lawson boom collapsed.

Most important however is the combination of planning restrictions on building new homes in the UK, and the long-running tax advantages of home ownership. Compared with the continent, where 100 per cent mortgages and tax concessions on mortgage interest are less common and stamp duty is much higher, British borrowers have had it very easy. Although planning restrictions are unlikely to be abandoned if they are relaxed, and property is forced to bear a bigger share of the tax burden, home-owners could be pressured to prize their pensions above their property over the next decade.

`The Independent' has published a free 27-page `Guide to Mortgages', by Nic Cicutti, the paper's award-winning Personal Finance Editor. The guide, sponsored by Barclays Mortgages, is available by calling 0800 585691. Or fill in the coupon on page 4.

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