Hundreds of thousands of British homebuyers who opted for foreign currency mortgages with lower interest rates are the latest victims of the property crunch.
Latest statistics now show that the euro has soared by nearly 20% against sterling during the last year.
The euro has climbed more than 19% against the pound since this time last year, meaning that borrowers whose earnings are denominated in sterling must dig deeper to make their repayments.
Reports also suggest that many Britons driven by their determination to buy their dream home have ended up borrowing more to cope with the shriveled purchasing power of sterling.
Katy Hepworth, overseas mortgage manager at broker Assetz Finance, said: “Those buying in France would have typically borrowed 80% of the value of their home, with the remaining 20% coming from the UK in sterling and being converted into euros.
“But this now costs you much more in sterling to get the equivalent amount in euros. We are now finding that people are asking for a 95% loan or 100% loan instead so that they do not have to bring over their money from the UK.”
Unlike Britain, where many banks and building societies have tightened their lending criteria, many continental European lenders are keen to gain a greater share of the market and are increasing their loan to value (LTV) ratios.
Hepworth further explained: “People are asking for higher LTVs not because they can’t afford the property, but because they are waiting for sterling to strengthen before moving their money to Europe to pay off their loan.”
Exactly the same strategy can be used for someone who already has a property in France and wants to benefit from the rise in the euro. For example, if you have an LTV of between 50% and 60% on a French property and you increase this to 80% by remortgaging, you could bring back that 20% to the UK.
These euros could buy more sterling today than they would have done in the past - but remember that currency speculation is a high-risk game where you could lose a great deal of money.
However, market experts have said that euro-denominated mortgages are not restricted to people buying holiday homes in Spain, France or Italy - some brokers marketed them to “sophisticated buyers” in Britain.
They say that the effect of the weakening pound on a typical euro mortgage over the past year has been to increase costs by £135 a month.
For example, a borrower with a mortgage of €150,000 (£118,000) shells out £760 a month on their repayments today compared to £625.50 a month this time last year, assuming a typical euro mortgage rate of 5.35%.
Euro-based mortgages have long been tempting for British borrowers because interest rates are often between points 1% and 1.25% lower than those available on sterling-based mortgages.
For example, French lenders offer euro mortgages which are fixed for three years from 4.15%. At the same time, one of the most competitive rates offered in the UK is from Woolwich, which has a two-year deal at 5.49% with a £995 arrangement fee – and this is only available to those who are borrowing up to 60% of the value of their home.
However, experts also believe that foreign exchange mortgages can help reduce monthly payments because lower interest rates are available, but at the same time, they are also more risky because the value of sterling can fluctuate which could mean that payments can rise sharply.
Most experts agree that, for this reason, it is best for homebuyers to have their mortgage in the same currency as their earnings. According to the experts, the only exception would be if the property was for rental in which case homebuyers should consider having the mortgage in the same currency as their rental income.
However, most lenders in the eurozone will only offer euro-based mortgages and so this may leave little choice for homebuyers who do not wish to raise a mortgage against their British home to buy abroad.
Alternatively, UK buyers who have already burned their fingers with foreign currency loans may wish to convert back into sterling or remortgage, but this could prove expensive, warn experts.
Miranda John, international manager at Savills Private Finance, said: “To switch your euro-denominated mortgage is costly because this is not common practice.”
She suggests delaying paying off your euro-based mortgage for as long as possible.
“It is not a good time to pay off your euro mortgage because comparatively your pound is not buying as much as it was this time last year.”
