Chance to cash in on strength of the euro

Published 15th Mar 2009

Overseas property owners are taking out mortages on their holiday homes abroad to buy bargains in Britain


Owners of overseas holiday homes are taking out mortgages on their properties abroad to buy bargains in Britain, amid signs that the euro’s strength against sterling could be about to reverse.

Brokers who deal in overseas mortgages are reporting a flurry of activity in the overseas mortgage market where approvals are up 75% since the start of the year.

Fiona Watts of the broker International Private Finance (IPF) said: “Over the past 10 years most people have raised money against their UK property to purchase a property abroad. We are now seeing a reversal of the trend. Borrowers are also benefiting from the exchange rate with the euro high against sterling.”

The euro has gained 25% against sterling since the middle of 2007. Earlier this month, sterling fell to its lowest level since the start of 2009 to $1.38 and €1.09 after the Bank of England agreed to a sixth consecutive cut in interest rates. Sterling closed at €1.08 last week.


However, the opportunity to cash in on the euro’s strength could be short-lived — spread-betting companies have reported a surge in the number of American traders betting that the euro will fall.

The European Central Bank cut interest rates to a record low of 1.5% this month and further cuts are widely expected. The Bank of England, by comparison, is thought unlikely to cut rates further and has embarked on other measures to boost the economy, such as its £75 billion “quantitative easing” programme.

Daniel Wray of FC Exchange, a currency trader, said: “Sterling has not reacted well to quantitative easing and could fall further in the short term — perhaps even getting close to parity with the euro as it did in December — but this could well be a signal to many traders to get back in. Over the medium term, we expect the euro will be hampered by further interest-rate cuts and potentially its own programme of quantitative easing.”

John Hardy of Saxo Bank, the online investment bank that specialises in currency trading, expects sterling to be strengthening by the second half of the year. He said: “The UK could bottom out more quickly than the eurozone. As a result, the pound could outperform the euro in the next two or three quarters.”

A survey by IPF revealed that 71% of foreign lenders expect the pound to strengthen to €1.20 by the end of the year.

Watts said: “Borrowers have a narrow window to make gains on their sterling transfer. Exchanging €250,000 will generate £24,138 more now than at the end of the year if the exchange rate hits 1.20.”

Overseas mortgage rates are also as good — or better — than those on offer here.

Borrowers in France are being offered 2.4% for purchases and 3.75% for remortgages — pegged to the Euribor, the rate at which European banks lend to each other — from banks such as BNP Paribas if they have a 30% deposit. Monthly repayments on a €250,000 loan would work out at €781 or £720. In Spain, you can get 2.51% from the likes of Barclays if you have a 30% deposit. Repayments on the same euro loan work out at €523 or £482. In Britain, the best two-year tracker from First Direct is at 2.89%.

Second-home owners are also cashing in on the fact that prices on the Continent have not fallen as much as they have in Britain. Whereas in Britain the average house price has fallen 18% from its 2007 peak, according to Nationwide, prices in some areas of Europe have proved more resilient.

In France house prices fell 3.1% in 2008. In Spain, prices are down 3.2% nationally but are thought to be flat in some areas around Santander and Bilbao.

Meanwhile, Britain is quickly becoming a bargain property hotspot — estate agents are seeing a flow of money from rich overseas investors. Last week, the Royal Institution of Chartered Surveyors confirmed buyer enquiries rose for the fourth month in a row, with many coming from overseas.

Russian buyers in particular are looking in London at Kensington and Knightsbridge, where viewings increased 28% in February, according to Knight Frank.

However, property prices may yet fall sharply on the Continent, leading to problems in future for those who borrow too heavily against an overseas property, so brokers advise leaving a margin of 30%.

Alternatively, it could make sense to take some equity from an overseas home to pay down debt here. Watts said: “This is a good way to reduce potential remortgage costs in Britain where credit is scarce.”

Nice little earner

Property investor Kevin Donaldson, 53, of Hertfordshire, mortgaged his French Riviera holiday flat in Nice to use the cash to buy repossessed British homes. His flat doubled in value over the past four years and he secured a €350,000 loan on it at a rate of 4.95%, fixed for three months, with BNP Paribas in December. It then reverts to 2.3% over the Euribor — the rate European banks lend to each other — which is now 1.8%.

“I’m keen to benefit from the exchange rate and seeing cheap opportunities in Britain, particularly in London,” he said. “It seems to me as I go around the auction houses that this is the time to buy. Prices might yet go down further but I don’t doubt they’ll come back again.” 350,000 loan on it at a rate of 4.95%, fixed for three months, with BNP Paribas in December. It then reverts to 2.3% over the Euribor — the rate European banks lend to each other — which is now 1.8%.

“I’m keen to benefit from the exchange rate and seeing cheap opportunities in Britain, particularly in London,” he said. “It seems to me as I go around the auction houses that this is the time to buy. Prices might yet go down further but I don’t doubt they’ll come back again.”

Source: ' times '

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