Look what your euro buys now

Some Brits may be reluctant to embrace the euro, but banks and building societies are already jumping on the bandwagon. Helen Monks investigates

BRITS keen to jump on the euro charabanc might now be considering taking out a mortgage in the new currency, enticed by the possibility of lower interest rates and cashing in on the strength of the pound.

Interest in Abbey National's euromortgage soared by 80 per cent last year as Brits began to see the euro becoming a reality. The UK's second biggest lender expects inquiries to grow in 2002.

But before borrowers become overwhelmed by europhoria, they should think very carefully about the risks.

There are two types of mortgage denominated in euros available to UK borrowers - one for buying property in the UK, which is largely restricted to those paid for in euros, and another for UK residents looking to buy a second home in eurozone countries.

In theory, buying a property here or in Europe with a mortgage denominated in euros looks as if it might shave interest off your mortgage repayments.

The European Central Bank's interest rate is currently 3.25 per cent, which stacks up nicely against the Bank of England's four per cent, so it is not unreasonable to assume that there are better deals in the eurozone than the UK.

But this is deceptive.

Britain has the most competitive mortgage market in Europe, which helps keep rates down - a typical standard variable rate on a UK mortgage is around five per cent, the same as a typical euromortgage.

The main problem with euromortgages is that Britons, being officially European, seem to think they know more about the currency than they actually do.

Thus, overconfident borrowers, attracted by trendy euromortgages, might forget that they are taking the same currency risk as choosing a mortgage denominated in US dollars, or any other currency.

Abbey National France managing director David Wells says: "There are risks borrowers must be made aware of.

For those using a euromortgage to purchase properties abroad, if the exchange rate goes against them and the pound weakens, this will have the same effect as a rise in interest rates."

For example, let's say the euro strengthens and is worth 66p - roughly speaking, 10 per cent above the current 60p level. If your mortgage is 166,666 euros, which converts to a loan of pounds 100,000, this would increase your total repayments by pounds 10,000 for as long as it remains at that level. It would be worse than that if the euro gains again.

The same effect holds true for euromortgages used for properties in the UK, should the pound strengthen against the euro. When buying property abroad with a euromortgage, you need to be aware of monthly charges of around pounds 10, to convert your sterling into euros on top of your repayment.

Some mortgage experts take a cautious stance, suggesting that, unless you happen to work in the City trading currencies, you should steer clear of euromortgages.

Ray Boulger, senior technical manager at independent financial adviser Charcol, says: "The risk could work in your favour, such as over the last three years, when the euro has been weak against the pound.

The problem is, unless you are fully conversant with currency markets, you'll never know if rates are likely to go the other way."

The main lenders offering euromortgages are Abbey National and Barclays.

Abbey National offers two euromortgages - one for home purchases in this country for borrowers paid in euros and one for borrowers buying second homes in France, Spain, Portugal or Italy.

Abbey's UK purchase mortgage allows you to borrow a maximum of 75 per cent of the property's value. The interest rate is reviewed every three months and is based on a European interest rate called Euribor, plus an extra 1.5 per cent, giving a rate of 5.02 per cent.

The minimum loan available on Barclays' euromortgage is low, at pounds 25,001, with a pounds 500,000 maximum. The current rate is 4.8 per cent - 1.5 per cent above Euribor.

This mortgage is also only available to borrowers paying in euros. The maximum loan is 65 per cent of the property's value.

Again, the bank warns that euromortgages are not for the unsophisticated.

But despite the warnings, there will be continuing interest in euromortgages - as more of us get paid in euros, the deals on offer will get more competitive. But even if you are financially savvy and are prepared to take on both the currency and interest-rate risks, opting for these types of loans is no easy ride.

Patrick Bunton, of independent mortgage adviser London & Country Mortgages, says: "Even if you are a whizz on the money markets, do you really want to keep watching the exchange rate, instead of just looking out for potential monthly interest-rate changes by the Bank of England?"

Find out more

For everything you need to know about the euro and its ramifications, see our fact file - click on E under Fact Files at www.thisismoney.co.uk

Copyright 2002
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