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European holiday home owners are now feeling the
squeeze due to the weak pound.
In theory for any holiday home
owner abroad, any increase in the cost of funding the
mortgage because of the decline of the pound ought to be offset by an
increase in the euro value of the property.
In practice, when you come to sell, most owners of
eurozone properties will have to reduce their asking price because
buyers are largely British or American and they have a figure in their
mind in sterling or dollars, both of which have declined against the
euro. They won’t want to pay the higher euro asking price.
Even worse, there is a double whammy. Most owners of
foreign holiday homes who took out a euro mortgage did so in order to be
able to claim mortgage interest against rental income. But with the
strong euro, many homeowners are being forced to reduce the euro rental
price or suffer voids.
‘Quite a lot of owners are looking
to remortgage in sterling where they have euro rental income, but it
depends on circumstances,’ says Simon Conn of Conti Financial Services,
which specialises in arranging foreign currency mortgages on overseas
properties. ‘It works both ways. Those who paid cash for the foreign
property by remortgaging their UK home are now looking to pay of the UK
debt and remortgage their overseas holiday or retirement home.’
If you bought a holiday home in the
eurozone three years ago for €750,000 with a €500,000 mortgage, it
would have cost you £510,000 and the mortgage would have worked out at £340,000.
Assuming it was an interest-only loan your borrowings would now be
equivalent to £393,000 – an increase of £53,000. The euro has
strengthened from 1.47 to the pound to 1.27 today and it doesn’t look
like reversing this trend any time soon.
If you borrowed at, say, 3.5% your
annual interest payments would be €17,500 a year or €1,458 a month.
But five years ago the sterling equivalent would have been £992 a month
whereas today you will have to find £1,148. Of course, if you have euro
rental income nothing may have changed provided the income remains
constant and is enough to cover the mortgage interest payments.
But if you have been advertising
your property for rent in sterling, and received payment in sterling –
as many UK owners do – you will be out of pocket unless you are
able to increase the rent, which is likely to be difficult in today’s
market.
Can you switch a euro
mortgage to sterling?
Clearly if you are renting out the
property you want to retain the mortgage secured against the foreign
property so that the mortgage interest payments are offsetable against the
rental income. So can you switch a euro mortgage to sterling?
‘It isn’t a problem in most
countries – Portugal, France, Spain or the US – although Italian banks
can be a bit difficult. But we can usually arrange a switch,’ says Conn.
The trouble with this is that it crystallises the loss. But if your
mortgage is large relative to the value of the property – say 85% or
more – this might be preferable to sitting things out and seeing the
debt increase in sterling terms and being unable to sell the property
except at a loss.
But what about owners of holiday
homes abroad who paid cash by remortgaging their UK property? ‘We are
seeing a lot of them raising a mortgage on the foreign property to pay off
their debt in the UK,’ says Conn.
People may feel under pressure to
sell their property abroad because of the current credit crunch. The
strong euro means demand for European property has decreased, so owners
are finding it more difficult to cash in their asset. One solution is to
remortgage their property in Europe, where interest rates are lower, and
use the currency-boosted proceeds to repay debt in the UK,’ says Conn.
But be aware that if the pound continues to slide against the euro this
could wipe out all the advantage of lower interest payments.
No shortage of buyers
But Conn is optimistic that if
owners want to sell, there are buyers around – albeit driving a hard
bargain. ‘We are finding a resurgence of interest from Scandinavians –
particularly Finns who have money to spend because of the oil wealth –
and we are still very busy arranging mortgages. There are still a lot of
people who want to buy abroad for holidays or retirement. But it is a
buyers’ market and there is a lot of negotiation on price.'
Conti Financial Services has been in
the foreign mortgage market for over 14 years and can arrange finance in
15 countries across Europe, Africa and the US and can arrange finance on
holiday homes, investment and retirement properties in over 45 countries,
with more than 225 mortgage products currently available. Maximum loans to
value are around 70% in France, Germany, Ireland, Italy, Monaco, Turkey,
US, up to 80% in Greece, Portugal and Spain but generally lower elsewhere.
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