Euros to Pounds : Currency Mortgages
Now, having looked at the importance of exchange rates on your
Euros
to
pounds, and how they can affect the values of your assets, both
positively and negatively, let's look at currency mortgages, which are
often used to finance such investments.
I cannot stress enough that most people fail to understand the significance or importance of currency exchange when it comes to buying or investing abroad. I do accept that many such assets are for pleasure only, but why not try to get the best of both worlds - if you can buy in a country you enjoy, and also make money on the investment from both capital appreciation and exchange rate movements - why not!!
Euros to Pounds : Currency Mortgages Simply Explained
Many people find it difficult to understand currency mortgages, and whether the monthly repayments will increase or decrease depending on which way the currency exchange rate goes. As we saw from the chart on the first page, when a price goes up, the first or base currency ( in this case the Euro ) is strengthening against the second currency ( in this case the UK Pound ) which is therefore weakening. So here is a simple way to remember, by looking at the currency chart of the pair.
| If your home currency is strengthening against the currency of your mortgage, then your repayments will decrease. |
So, if you live in Europe and have bought a UK asset with a pound sterling mortgage, your repayments would be reducing, month by month, because your home currency is Euros, and your mortgage would be in UK pounds. Now the opposite is also true as follows :
| If your home currency is weakening against the currency of your mortgage, then your repayments will increase. |
So if you live in the UK, and have a mortgage in Euros, then your repayments will be increasing, and are likely to do so for some time to come. Let's look at a simple example and see how it works in the case of a UK investor buying a property overseas.
Euros to Pounds : Currency Mortgage Example
Imagine
that you have found your perfect property in Italy, which you would like
to buy as a holiday home in Portofino for 350,000 Euros ( I wish) - I
will ignore tax and other fees for the purposes of the example, but I
will cover these later, when I look at various countries in more detail.
Let's also assume that the currency exchange rate is 0.75.
The property will cost us £262,500, and we now have a Euro asset of 350,000 euros. Assume for a moment that the Euro continues to strengthen and the pound weaken and the exchange rate goes to 0.90 in the next few months - what has happened to the value of our property - in effect it has increased to £315,000, a huge amount. However, imagine if the rate had fallen and gone the other way, with strength returning to the UK pound and weakness to the Euro, and the rate was now 0.60. Our asset would now be valued at £210,000 - not such good news. This is why it is vital you understand the risks, and have some idea of your exposure both in the capital asset value and also in the mortgage.
Let's look and see what happens with the currency mortgage, using the same figures as above and with the exchange rate moving from 0.75 to 0.90 in equal steps. Assume we have borrowed 300,000 euros at 5% on a simple interest only mortgage. This would be 1250 euros per month
| Mortgage In Euros | Exchange Rate | Mortgage repayments in UK Pounds |
| 1250 | 0.75 | 937.50 |
| 1250 | 0.76 | 950.00 |
| 1250 | 0.77 | 962.50 |
| 1250 | 0.78 | 975.00 |
| 1250 | 0.79 | 987.50 |
| 1250 | 0.80 | 1,000.00 |
| 1250 | 0.81 | 1,012.50 |
| 1250 | 0.82 | 1,025.00 |
| 1250 | 0.83 | 1,037.50 |
| 1250 | 0.84 | 1,050.00 |
| 1250 | 0.85 | 1,062.50 |
| 1250 | 0.86 | 1,075.00 |
| 1250 | 0.87 | 1,087.50 |
| 1250 | 0.88 | 1,100.00 |
| 1250 | 0.89 | 1,112.50 |
| 1250 | 0.90 | 1,125.00 |
So, is this simple example we can see that our monthly repayments have increased by nearly £200 per month, which may not be enough to cause financial problems for you, but is certainly worth considering when looking at all the options. It is of course possible to protect yourself against currency fluctuations by buying forward contracts which fix the price for a given period. I have covered this aspect of using a currency broker on another site - if you would like more details please just follow the link here which will take you to the site - managing currency risk.
One can of course avoid the currency risks in the mortgage element, by raising the finance on your property in your home country and simply paying in cash for the overseas asset. Many yacht buyers take this approach as raising finance for a marine mortgage, with the boat berthed overseas, can be difficult. Using this approach, you are then only exposed to currency fluctuation on the capital value of the asset.
OK - having decided on changing our life and our euros to pounds, let's have a look at one or two countries where we might buy a property, or a yacht for pleasure, or our retirement.