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Interest and Exchange Rates and the Mallorca Property Market

With general economic data releases and Spanish and Mallorca property market sentiment all making depressing reading we continue our monthly "better news" feature on interest rate movements and the outlook for Spanish and Mallorca mortgage holders.

Following the unprecedented rate cuts in the Euro Zone and UK last month which took base rates to 3.25% and 3% respectively further cuts came as expected this week that took rates to 2.5% and 2%, with further cuts on the horizon. While no one should hide from the simple fact that the reason for these aggressive and unprecedented cuts are due to the awful economic picture and prospects for the foreseeable future it is at least some relief for existing property owners in the UK and Spain and a helping hand for those looking to take the plunge and purchase a new property.

Importantly for purchasers of Spanish and Mallorca property, these rate cuts, along with the international governmental rescue / support packages for the financial sector have helped push the main reference rate for Spanish and Mallorca mortgages, the Euribor, down to 3.77% when only a few weeks ago it stood at over 5.5%. For a mortgage of 200.000€ over 25 years that makes a difference of 200€ per month or 2,400€ per annum.

Coupled with this good news is however the ongoing problem for UK buyers of Mallorca property, Sterling's weakness against the Euro. In a little over a year the pound has depreciated by nearly 25%, a major negative factor for a UK buyer purchasing in the Euro Zone. By example a purchaser requiring 400,000€ would have had to transfer only 260,000 GBP last year while now would have to find 340,000 GBP, 80,000 more!

Although most economists feel that Sterling will no longer depreciate further and will slowly regain ground against the European currency it may well not be until 2011 that we see at least half of the ground recovered.

So what does this all mean for Mallorca property buyers and particularly those wishing to take advantage of  the small but growing number of investment opportunities arising in this market? Further more what can Sterling denominated purchasers do to mitigate against the strength of the Euro?

• Although cash buyers are those with the greatest bargaining strength in this market, with fast reducing interest rates the time may well be right to use bank mortgage finance to assist with a purchase and this is particularly the case for UK buyers who want and need to minimise the amount of Sterling to be transferred  and converted for any acquisition. Although banks are being very strict, loans of 70% LTV / purchase price are still being granted for borrowers with secure income.
• When taking any loan ensure that partial repayments or early cancellation of the mortgage is possible without penalties in order that the loan can be reduced should interest rates start to rise and / or Sterling strengthen allowing you to transfer and convert funds from the UK
• For UK buyers with cash deposits in the UK a second way of acquiring without suffering with the penal Sterling / Euro exchange rate is to take out a Euro loan against the strength of the Sterling deposit. Although options vary it should be possible to get an 80 - 90% loan in Euros of the Sterling deposit. The interest on the monies deposited can be used to at least part pay the interest on the Euro loan and as soon as the exchange rate improves sufficiently the Sterling deposit can be transferred and used to repay the Euro loan ie You are in charge of deciding when you wish to do the exchange not the bank or the simple circumstances of when you are buying the property.
• Always use a specialist currency transfer and exchange broker in order to get the best rates and avoid the very high commissions charged by normal high street banks.

In summary a possible strategy for a UK buyer, with a good credit record and secure earnings, wishing to take advantage of the weak market to invest, would be to take out a Euro mortgage in Mallorca of circa 70% of the purchase price (taking advantage of the lowering interest rates) and look at a separate Euro loan, against a secure Sterling deposit, for some or all of the remaining 30% deposit. While it is unlikely that a purchase will be possible without any funds requiring transfer from the UK, a significant proportion of the purchase price can be obtained using Euro loans.

For further information on buying opportunities, the appraisal of different investment options and financing of the same, please contact David Novi BA MPhil MRICS on info@novipropertymallorca.com 

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