EXCHANGE RATE GAIN EURO MORTGAGE VERSES STERLING MORTGAGE

Below is an example of the advantages of purchasing a French or Spanish property with a EURO mortgage at a time when there is a downturn in the exchange rate of sterling to Euros.

Whilst the exchange rate hasn't dropped to it’s current level since 2009 , (which in itself has a negative effect on the availability of cash to put towards the purchase of a French or Spanish property), there are still potential advantages to consider by using a Euro mortgage to purchase the property when the Euro exchange rate is low against the pound, if you feel that the exchange rate will recover and increase in the near future.

Below is an example demonstrating an exchange rate gain as a result of purchasing a Frenchor Spanish property with a Euro mortgage as opposed to a cash purchase or a purchase with a Sterling mortgage .

The example illustrated is based on the following parameters :

Purchase price of Euros- 370,000,

Term in years – 20.

French mortgage interest rate - 2.05%.

Exchange rate at the point of purchase 1.147E / £.

CASH PURCHASE FRENCH MORTGAGE UK MORTGAGE

Outlay in £ £322,581    Mortgage LTV 85% Mortgage LTV    85%
Effective Exchange

Rate 1.147 Mortgage Euros 314,500 Mortgage Amount £274,194
On day of purchase Immediate Cash Immediate cash

   Investment £48,387 Investment    £48,387
   Mortgage term (yrs) 20    Mortgage term (yrs)    20
   Mortgage Interest Rate 2.05%    Mortgage Interest Rate    2.05%
   Total capital payments    Total capital payments

over term    £282,056 over term £322,581
   Total capital Outlay £282,056 Total capital Outlay in £ £322,581
   Effective Exchange Rate Exchange rate on day

Over the 20 year term 1.312 of purchase 1.147

   Assumptions Common to all Scenarios

   Purchase date 17/11/1995
   Purchase price in Euros 370,000
   Exchange rate    1.147
   Purchase price in £ £322,581
UK RPI 0.00%

UK CGT Rate 28%

Number of purchasers 2

   UK CGT Allowance £22,200
(current rate)
   Exchange Rate Gain /Loss

GAIN £40,525

The example was based on the exchange rate, provided by the Bank of England between 17/11/1995 to 17/11/2015 (20 years).
(It included highs of 1.75E/ £ and lows of 1.02E/ £)

Evolution of property price annually assumed to be 0%

The use of a Euro mortgage has the effect of reducing the cash investment expressed in sterling to £282,056 representing a saving of £40,525 compared to a cash investment of £322,581 had the purchase been in cash (£s) or via a sterling mortgage on the day when the exchange rate was low ( in this example it was 1.147E/£).
Apart from the details provided above there are other considerations to take into account if you anticipate that the exchange rate will increase in the medium term, higher exchange rates tend to result in there being more active buyers this increase in the demand for properties has the effect of increasing French or Spanish property prices.
A EURO MORTGAGE REDUCES YOUR INVESTMENT IN STERLING. In addition to the gain shown in the above example, the use of a EURO mortgage reduces the sum that you are investing in £’s at a time when the exchange rate is disadvantageous.