I sent out an email and posted information on our website of a new mortgage product that allows people to purchase a property in Mallorca in Euros without changing their money from Sterling into Euros. You can read the article here – Mallorca Property Mortgage details. The objective is to avoid losing out in the exchange while the pound is at its current low level.
A few people have asked for a better understanding of the way the mortgage product works so here is a copy of one of the illustrations I gave. This one is based on a property purchase price of Euro 150.000. (Sterling has moved up since I wrote this illustration, and it looks set to continue … I will be writing on this early next week).
The key terms to look out for here are the valuation price, and the actual purcahse price, and the difference between the two.
The product works on the basis that many properties are currently selling for less than the bank valuation. The difference can be as much as 30%. The bank will lend 70% of valuation amount and, depending on the exact amount the final purchase actually costs, this can cover the bulk of the actual Euro purchase payment required for the property – possibly even all of it.
The purchaser is required to deposit an amount, in Sterling, that means the banks percentage lending on the total valuation amount is 70%. So this is not a product whereby the buyer can borrow 100% of the loan value without putting any deposit forward. But the deposit is held in Sterling avoiding the need to exchange these funds at the current time.
The only sum that the purchaser has to pay in Euros at the time of purchase is the purchase charges (taxes and legal fees – usually around 10%).
For example.
- Purchase price: 150,000 Euros
- Bank valuation: 214,000 Euros
- Charges (tax / legal) @ 10%: 15,000 Euros – paid at time of purchase.
- Euro finance available from bank: 70% of Euro 214,000 = Euro 150.000 – the amount required to purchase the property.
- Deposit @ 30% of valuation price = Euro 50.000 but this is retained in GBP. At 1.06 Euros to the pound = 42,000 GBP (approx) – held on account by the bank.
The Sterling deposit held by the bank will get interest paid on it, so this negates any potential disadvantage of taking the money out of your UK bank and off-sets against the total monthly outgoing covering the Euro loan interest payments.
When the pound improves the purchaser can then exchange their deposited funds into Euros. The loan values are recalculated so that bank mortgage continues to cover up to 80% of the total loan value. Let’s say Sterling moves back up to a level of 1.30 and you decide to make the exchange at this point.
- New loan amount = 150.000 x 80% = Euro 120.000.
- Therefore you require 30.000 Euros to take the loan down to this level. This equates to 23,076 GBP.
- There is, therefore, a surplus of GBP 18,923 from the original deposit payment which is returned to you. (Or you can, if you wish, opt to pay off more of the loan at this stage.)
The end result is an 80% mortgage on a property for which you have paid Euro 150.000 (+ charges) and which has been valued at Euro 214.000.
The product is most advantageous for properties that have sale prices 30% lower than the valuation. Where the percentage difference between the valuation amount and sale price is lower the buyer will need to compensate by changing some money into Euros.
The great advantage of this mortgage product is that you are buying a property at a time when prices are depressed. Mallorca ( Majorca ) continues to be a very good investment prospect and looks set to “bounce back” quickly when the economic environment improves – unlike much of the mainland and other locations in Europe. You can read more about the market environment in my last Mallorca Property Market Update. It was written in October last year but the observations made are proving accurate.
Hopefully that sheds some light on how this mortgage works. Drop me an email (kevin@mppsearch.com) if anything needs further clarification or you want a further illustration.
Comments (1)
[...] Be in a position to buy. Obviously the more serious the vendor thinks a buyer is the more seriously he will treat them and any offer they make. Buyers who have cash, or have agreed finance in place, are obviously in the strongest position. This does not necessarily mean however that you need to be rolling in cash to take advantage of the market at the current time. Whilst credit from banks is still tight at present, they are (believe it or not) eager to get things moving and will lend money to people who can show they can make interest repayments and are buying a property at a sensible price vs. the mortgage. This later point should not be a problem at present as bank valuations are generally showing properties to be a higher value than they can be bought for! There is one mortgage product in particular that allows you to purchase in Euros without exchanging the bulk of your Sterling until the exchange rate between the two currencies improves. You can see more about that on our web site here – Sterling / Euro mortgage product for properties in Mallorca – and also on this blog posting – Illustration of Sterling / Euro Mallorca property mortgage. [...]