Why buy abroad?

The papers have been full of doom and gloom about the UK and Irish property markets. The collapsing of the buy to let markets, the credit crunch meaning harder to access funds and ever increasing interest rates, and the IMF reporting that both UK and Irish property are over 30% over-valued and predicting a 40% chance of a property bubble burst.

With a potential UK and US recession, moving assets into stocks is seen as risky and government bonds will not give the returns that those that have invested in property are used to. Hence many are looking to invest in property abroad.

However the recent drop in the sterling against the euro has made a number of UK investors pause thinking they are suddenly getting a lot less for their money. This has led to some fallacious thinking which we shall dispel.

Those leveraging assets and income

With the drop of the pound, an investor may feel the worth of the sterling they can raise has been reduced by just under 15%. We will show that in actual terms those taking a French mortgage will in fact be losing out by less than 3% which is substantially less than the current rate of French property capital growth.

Let us take an investor that has assets and income that allows them to borrow £350,000. If they bought a year ago when the pound was €1.48 then their budget would have been €518,000. However at an exchange rate today of €1.27 they may think that because their budget has been reduced to €444,500 that have lost €73,500 of worth simply through the drop in the exchange rate. This is not true.

As an example, we will take two hypothetical clients. Tom fell in love with an apartment a year ago and signed at price of €450,000 whilst the exchange rate was €1.48. Mary bought an apartment a few days ago for the identical price but with an exchange rate of €1.27.

Both Tom and Mary decide to take out an 85% French mortgage, the maximum currently available to a foreign buyer. This means they have to pay upon signing 15% of the €450,000, which is €67,500. They also have to pay around 8% in Notaire fees, around €36,000. Thus each has to find €103,500 for the final purchase.

This will cost Tom £70,000 and it will cost Mary £81,500. Hence Tom will be £11,500 better off than Mary. At the €1.27 exchange rate that is a €14,605 difference which is less than 3% of the overall cost of the apartment. A dent in the finances but certainly not disastrous. The important thing to note is that exchange rate both Tom and Mary pay for the balance is identical and is the average exchange rate over the life of the mortgage (eg 25 years).

The effect is that though the overall budget may be initially reduced to meet the stringent French credit requirements, there is only a very small net loss. With a French variable rate mortgage, should the sterling fall further then repayments remain the same and the duration of the loan is increased to compensate. If sterling rises then repayments become cheaper and the relative debt is correspondingly reduced.

Hence we conclude that the benefits of moving the capital into a more stable real estate market with greater capital appreciation by far outweighs the current fluctuation in the currency market.

Those with capital to invest

Those that have the capital to invest can benefit from investing in the currency of their choice whilst borrowing in euros. There can be tax benefits as well as hedging against the currency markets. Please contact us and we will be more than happy to give advice specific to your situation.