Home and away, you can't lose

As the euro falls to record lows, there has never been a better time to buy property on the continent

By Paul Slade
Friday 16 August 2013 06:17

The euro hit another record low against sterling on Wednesday, bringing its slide in value since launch 16 months ago to an impressive 20 per cent.

That means more pain for UK manufacturing industry, which already finds its exports all but impossible to sell in the 11 countries that make up Euroland. But, for UK buyers, the strong pound can mean big savings, and never more so than when holiday homes on the Continent are involved.

UK buyers have seen the price of homes in France, Spain, Ireland and the other Euroland countries tumble since the new currency made its début in January last year. As the table below shows, a two-bedroomed Italian villa priced at the euro equivalent of £60,000 in January last year could now be had for just £49,000.

Those who fund their purchase with a euro-denominated loan, but make the repayments from sterling income, benefit a second time as the euro slips in value.

Many UK buyers choose a euro-denominated loan because they hope to benefit from continental Europe's lower interest rates. The Bank of England base rate today stands at 6 per cent, against a European Central Bank equivalent of just 3.75 per cent.

But Ray Boulger, senior technical manager at independent mortgage advisers John Charcol, says any practical advantage to UK mortgage borrowers is marginal at best. Euro-loans do not offer the same wide range of discount deals available on conventional UK mortgages.

Taking France as an example, Abbey National's euro-denominated variable-rate loans range from 4.95 per cent for borrowers with a 40 per cent deposit to 5.25 per cent for those with a 20 per cent deposit. The bank also offers a two-year discounted sterling loan with no penalties, rates for which start at 5.64 per cent.

Mr Boulger says: "The actual difference in rate is quite small. The real decision needs to be made on whether you want to fund your purchase in euros or fund it in sterling."

Unless you already own a good part of the equity in your existing UK property, that decision may well be made for you. If you want a sterling mortgage, the usual route is to secure the loan against your existing UK property. But lenders will give you a second loan on that property only if you already own enough of its equity for them to know their second loan is safe. In other words, if you want to borrow an additional £50,000, you will need to own at least £50,000 of equity in your UK home before you get it. Even the most generous lenders will not advance more than 90 per cent of the value of your UK property as a second loan.

Choosing a Euro mortgage inevitably makes the process more complicated. Even so, it is possible to smooth your path somewhat by using a UK lender with English-speaking offices in the country where you want to buy, plus a trusted UK name and a head office on this side of the channel.

Abbey National is just one of the UK lenders that offer Euroland mortgages denominated in either sterling or euro. Sterling loans are available through the bank's UK operation, French and Italian ones through subsidiaries which are based in those countries. Barclays operates in a similar way, with most of its own continental European staff based in France and Spain.

Mr Boulger says: "If I buy a property in France and I fund it with a euro mortgage, I am matching my asset and my liability. If, on the other hand, I buy a property in France and I fund it in sterling, I am mismatching my asset and my liability. If the euro continues to fall, I would lose out by doing that because I would have bought a euro asset and funded it with a sterling liability.

"I would normally recommend that people fund their purchase in Euroland with a euro mortgage. That's mainly to avoid the mismatch, but also because I think the euro will remain relatively weak for the foreseeable future."

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