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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.

Exit scenarios

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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5 comments so far. Why not have your say?

simms45

Jun 13, 2012 at 16:09

i have explored this carefully with banks and checked with lawyers. If you borrow euros with a greek bank and greece exits the euro all savings and borrowing will be redenominated in drachmas. The reason is otherwise every greek person will face bankruptcy if they only have all their savings changed to drachmas but keep all their debts in euros. It is not possible to do one without the other. if you have borrowed euros in any other country or borrowed in the UK you will not benefit and in fact lose a lot of money in the short-term as the house plummets in value.

Therefore if you expect Greece to leave shortly and can get a greek mortgage then it is probably an interesting time to buy as the drachma will be worth 50% less after devaluation but the bargain hunters will come in and bid up the value of properties in the key tourist spots.

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Stella Arman

Jun 13, 2012 at 16:37

Absolutely no point in converting a Euro mortgage into Sterling. The interest rates are much higher and the decrease in Euro value would mean no currency gains either. Far better to keep the Euro mortgage with it's low interest and pay off with Sterling if you think that sterling will increase in value against the Euro then you could gain against the weaker euro.

However, Europe will gain in strength after the Grexit, the northern zones are too strong to allow failure. There is too much Anglo-Saxon attitude bullying going on in City Wire. The UK has far more to fear long-term.

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Ines

Jun 13, 2012 at 21:50

You have nothing to fear but fear itself.....

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David Harvey

Jun 17, 2012 at 08:41

I was watching Greek homes for sale for some years and there is a curious method in pricing. I noticed over the last ten years that if a house fails to sell the price goes up. There are still houses for sale from the time I first started looking 10 years ago.

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David barket via mobile

Jun 17, 2012 at 11:25

The whole of europe has experienced a property bubble fueled by excess lending. Much of what we are seeing is a result of this bubble. Prices will notbounce back to bubble levels as estate agents would have us believe.

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