European Property Investment: Mortgages-which currency?

July 19, 2013

A recent class action by British-based Solicitors Maxwell Alves, against Alpha Bank, Cyprus, for the alleged mis-selling of mortgage products denominated in Swiss Francs, has prompted this blog post on the pros & cons of foreign mortgages.

The Solicitors claim their clients were not made aware of the exchange rate risks and were given no alternative option when buying off-plan units. Two key issues are at stake: whether the bank overlooked its duty of care and whether the use of the power of attorney had procedural inconsistencies.

European Union-Overseas Property Investor Protection

Euro notes-Mortgage CurrencyIt is important to bear in mind, not all European financial institutions abide by the same standards of UK-based ones. So whereas a UK-based investor might have the reassurance of the Financial Conduct Authority (FCA) or the Financial Ombudsman Service, banks operating abroad do not answer to the same authority, or protocol. Although having said that, UK consumers are afforded protection by EU legislation on cross-border selling.

This case sparks interest as it is legal action on behalf of UK citizens against entities based elsewhere in the EU. If this case is successful, it sets a precedent for other UK-based individuals to take action in other EU countries.

Overseas Property Mortgages

We know that currencies strengthen and weaken according to a number of factors, including the money markets, relative strength of economies, currency devaluations and this in turn affects our buying power for investing in property abroad.

Not only this, but also the range of interest rates on mortgages varies greatly overseas. Some markets have had mortgage interest rates at between 5-10% in recent years, like mortgages in Turkey, and Polish mortgages.

So high interest rates on mortgages abroad and currency strength have influenced buyers, in the past, to opt for significantly lower rate mortgages, in other stronger currencies like Swiss Francs. In the short term, this has looked attractive, but there have been inherent exposures due to multiple currency exchange rate fluctuations AND the potential for interest rate changes.

For example, Hungary has been hit by high levels of mortgage debt in foreign currencies. Many overseas buyers preferred the lower Swiss Franc mortgage rates (as opposed to the Forint) and opted for these, at the time of purchase. According to Hungary’s Financial Supervisory Authority, about 70 per cent of all bank loans are denominated in currencies other than the forint and 95 per cent of that is in Swiss francs.

This is a problem because the cost of foreign loans went up when the global financial crisis hit, as local currencies depreciated against the Swiss Franc, all at a time when the value of property has declined in some of these markets.

There are many options for financing the purchase of a property, including buying in Swiss Francs. However with the past few years’ global economic uncertainty and fluctuating exchange rates, as well as interest rates, this has not always proved to be the best option. The cost of foreign loans went up when the global financial crisis hit, as local currencies depreciated against the Swiss Franc. This is now why we are seeing recourse in cross-border, legal action.

Buying European Property-Mortgage Options

There are advantages of getting a mortgage in the currency of your investment property purchase, your interest costs are in the same currency as your income, so there is no currency exposure there, although the interest rate might be higher. Also the local bank will have an interest in the secured asset (the investment property) and will check out your property purchase, so giving an additional layer of reassurance for the buyer.

If you opt for a lower interest rate mortgage, potentially in your home country, you may gain from lower monthly repayments, but have the exposure of income and costs in different currencies.

If you opt for a lower interest rate mortgage in another currency (not your home currency, nor the same currency as the investment you are making) then you are adding additional layers of vulnerability and risk.

Arguably this route ought to be for higher risk takers, and those who can afford for things to fluctuate and not lose sleep over it.

Buying property abroad in Europe, what should you do?

It is a good idea to think this through before buying, set a budget and make sure you get your finances in place at an early stage.  It often takes longer to secure an overseas mortgage than in the UK and the process differs from country to country. So it is best to make sure the requirements are known up front and even pursue several mortgage applications at the same time, this tends to be easier to do through a broker. Otherwise you may end up with no finance to follow through on the purchase and may put the deposit in jeopardy.

The good news is that property prices are so competitive in Europe currently and for British-based overseas buyers, interest rates are low domestically and sterling is fairly robust in comparison, thereby offering greater buying clout.

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Property Venture® is an award-winning, UK-based agency for overseas property who helps people buy investment property and holiday homes in Europe, more easily and safely than they can on their own, because we offer grounded common-sense advice.

The focus is mainly greater Europe: Poland property, UK investments, Spain property, Turkey property, Cyprus property

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