Med In Heaven
The Impact of the Fall of Sterling on the UK Property Buyer
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
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
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