Should I Use Savings or Mortgage?

The Great Currency Purchase Debate – by Alison Lowther de Cotta

The huge 80-seat majority win by the Conservatives in last week’s General Election, has now sealed the deal for the Brexit path to forge ahead. The 31st January 2020 deadline is now a sure thing.

Sterling initially surged up to 1.20 levels but has retracted to 1.17 against the Euro.  The general consensus advises that Sterling is in for a volatile ride over the next few months, if not years, whilst the terms of Brexit are clarified. This is still just the beginning of the exit path and even once the Withdrawal Agreement is passed, the UK could still leave the EU at the end of 2020 without a trade deal. 

This makes for an uncertain outlook for the pound until things are clarified. The past few weeks in the run up to the election, has seen the pound at its highest levels against the euro in the last two years, however, the overall weakness of the pound has been a constant sign of post 2016 referendum uncertainty. The likelihood of the instability of the pound is probable until the full extent and consequences of the Brexit move are revealed. A lot can change over the coming months as the finer detail of the UK’s future trade relationship with the EU is negotiated.

For the many UK Citizens who dream of having a second home in Spain or an eventual permanent move to Spain at retirement, there is good news!  The mortgage market is widening. There are more lenders who are very keen to lend to foreign clients creating healthy competition, with European bank rates already very low.  Along with the new ruling at the end of last year by the Spanish courts, whereby legislation was passed that banks must now pay the key costs associated with a Spanish mortgage, not the borrower, application costs have also been greatly reduced. This makes for the best conditions for buying with a Spanish mortgage since pre-recession times.

Many British clients are using a Spanish mortgage to hedge the volatility in the GBP/EUR exchange rates. How does this work? If you were a British cash buyer purchasing a Spanish home at the moment, it would mean that you would have to convert 100% of your sterling savings into euros to purchase the property at current uncertain exchange rates. However if you apply to borrow the maximum amount that you can borrow in euros from the Spanish lenders (currently 70% LTV for non-residents), this means that you are converting as little as possible sterling to euros at current exchange rates, thereby reducing your cash exposure to currency fluctuations.   One of the most attractive features of a Spanish mortgage is that they offer a great deal of flexibility to borrowers, as far as partial or total early redemption of the loan is concerned. Some lenders will allow you to redeem at no cost at all and others will make a nominal charge of 0.25% of the amount you pay off in the first three years of the mortgage. So, for example, if you paid off €10,000, it would cost you €25 to do so. This means that many clients are borrowing the maximum in euros at the moment in order to have minimum exposure to current GBP/EUR exchange rates, but they are able to maintain the option of paying off If you want to understand more or have a specific question you would like answered, please do get in touch.

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