View the article online at http://citywire.co.uk/money/article/a595591
What would a 'Grexit' mean for euro mortgages?
Owners of holiday and retirement homes in the eurozone should think about switching their euro borrowings into sterling, says Lorna Bourke.
Where it was possible a couple of years ago to buy a return flight to, say, Alicante for £120 a head during the school holidays if you booked in advance, today that same flight will cost £375 or more – or £1,500 for a family of four.
This means that owners are finding it increasingly difficult to offset costs and mortgage repayments by renting out their homes to holidaymakers.
What happens to a euro mortgage if Greece and possibly Spain exit the currency?
If you borrowed euros – or for that matter sterling, US dollars or any other currency – to fund a purchase you will still owe the money in euros or whatever currency you borrowed in regardless of any change of currency in the country where you purchased or the value of the property.
Many UK homebuyers borrowed euros from UK and eurozone banks to finance purchases and they will continue to owe the money in euros even if some countries exit the currency.
If Greece exits the euro the value of the property may well fall further as it will probably be revalued in drachmas, which could decline by as much as 50% if Greece and/or Spain exit the currency. However, if prices fall further foreign buyers are likely to emerge looking for bargains which they can buy with an even stronger euro. The same is true of Spain.
Time to switch borrowings into sterling?
If Greece and Spain leave the euro, (and possibly Cyprus, Portugal and Ireland) the currency is likely to strengthen against sterling, which will make it even more expensive to fund a euro mortgage. It'll also make it even more expensive for people to holiday in France and Italy and those countries which remain within the euro.
Now might be the time to bite the bullet and switch any euro borrowings back into sterling – if you haven’t already done so.
However, it seems likely that even if Greece does revert to the drachma many individuals in the private sector will continue to trade and accept euros (just as many traders in third-world countries prefer US dollars to their local currency). So owners of holiday homes who have always been free to denominate their rental in whatever currency suited best will continue to do so.
Those who are likely to suffer are institutional holders of Greek and Spanish sovereign and bank debt – other banks and pension funds. This debt will be massively devalued if not written off entirely. It is not clear whether loans and mortgages taken out by Greek and Spanish residents will revert to their local currency. But since many Spaniards and ordinary Greeks are already unable to pay their euro-denominated mortgages, this might become academic.
It’s possible that Greece and Spain will follow the US lead, where the banks have been persuaded to either reduce interest charges to struggling mortgage borrowers or to write off part of their debts.
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