Stan Streason Posted October 22, 2009 Share Posted October 22, 2009 I own my French second home outright and am in for the long term. My income is all in sterling.If I were to raise a mortgage of say €100k (valuation and earnings limits are no problem) I am sitting with the cash. If sterling gets worse I translate a large chunk into setrling (leaving enough for say a couple of years repayments and running costs) and then when sterling gets better (and within a 5 year period I am relatively confident it will) I translate back at the better rate. I know I am currency speculating and understand that that risk and I know there will be arrangement fees and exchange spreads to meet but this seems to protect me at present from sterling income and high euro expenditure.I am not sure I would ever actually have the guts to do this but can anyone see any other flaws I have missed as a theoretical excercise?As long as I look long term it seems to have a lot of upsides. Link to comment Share on other sites More sharing options...
andyh4 Posted October 22, 2009 Share Posted October 22, 2009 The flaw Stan is as you already state speculation and your gross assumption that the pound will go back up within 5 years. The pound moved from around 2DM=1GBP in late 96/H1 97 . It went up to 3DM = 1 GBP and on conversion to the Euro this became 1.5€ = 1 GBP (2DM=1€ near as damn it). In 2008 the pound then dropped back to nearly 1€ = 1GBP. So 11-12 years for the pound to return to where it was. Who is to say that the old 1995 and before rate is not the right one? Why do you think it should move back within 5 years - or indeed at all. If you analyse why you think that is the case deeply, I think you will find that the prime reason is emotional attachment to your own (as in nationality) currency and emotion would be a bad reason to invest. Link to comment Share on other sites More sharing options...
PeterG Posted October 22, 2009 Share Posted October 22, 2009 More likely than not, the interest you pay on the loan will out weigh any potential gains Link to comment Share on other sites More sharing options...
NormanH Posted October 22, 2009 Share Posted October 22, 2009 Are you sure you can get a mortgage on a house you own already?I am assuming a French lender. Link to comment Share on other sites More sharing options...
Chancer Posted October 22, 2009 Share Posted October 22, 2009 And if you can (I also would like to know if it is possible) dont forget there will be the frais de hypotheque to take into account.As someone that will probably need to borrow money in the future to spend in €'s on my property here it seems more atractive than borrowing in £ against my UK property. If the market moves! Link to comment Share on other sites More sharing options...
Pickles Posted October 22, 2009 Share Posted October 22, 2009 [quote user="Stan Streason"]I am not sure I would ever actually have the guts to do this but can anyone see any other flaws I have missed as a theoretical excercise?[/quote]If the money is going to be put in a savings account, I would have thought that you'd be lucky to get a return equal to the interest that you would be paying on the money - especially after tax. So you may end up paying more interest than you are getting. I seriously doubt whether the movement of the £ against the € is going to give you that good a return, bearing in mind that any gain would be taxable - how much of a swing are you reckoning on?I'm admittedly very cautious in outlook, but I would have thought that borrowing money to speculate in that way leaves you exposed for little return - particularly when you face the higher costs that one does compared with the big boys.RegardsPickles Link to comment Share on other sites More sharing options...
Stan Streason Posted October 22, 2009 Author Share Posted October 22, 2009 Thanks for the comments.I do believe in cycles. About 6/7 years ago I cashed in my Equitable with profits fund , took the hit and invested it in a tracker when the market was at about 3,500. Over the next cycle the market pretty much doubled before going back down to about 4,000 last year. I have no doubt it will go back up again and have invested as much as I can afford at the current low levels.Also a few years ago I purchased some dollars at $2 to the pound (it touched that level for a couple of days). I bottled it a bit and sold them a year later at about $1.7 before they went up again and was feeling very smug. I should have waited and got 1.5 but I was happy at the time.I have always tried to buy when everyone else is selling and vice versa. (Hence I bought my French house last Feb when I appeared to be the only buyer in sight and had vendors falling over themselves to reduce their prices to me).This is a theoretical excersise but so far most of the coments have been financial and things like interest rates, costs etc could be factored in to give the required exchange rate differential to get me "in the money". Link to comment Share on other sites More sharing options...
Tony F Dordogne Posted October 22, 2009 Share Posted October 22, 2009 You raise a mortgage on your property and tell the lender you want to - say - make improvements on the property. You fail to make the improvements, instead you speculate with the money.You have obtained a pecuniary advantage by a deception and are liable to get charged, especially with the mortgage climate in its present state, especially as you have speculated about doing so online in advance of doing so.That is a serious down side! Link to comment Share on other sites More sharing options...
Pickles Posted October 22, 2009 Share Posted October 22, 2009 [quote user="Stan Streason"]This is a theoretical excersise but so far most of the coments have been financial and things like interest rates, costs etc could be factored in to give the required exchange rate differential to get me "in the money". [/quote]Not wishing to teach you to suck eggs, but because the money is borrowed you need to factor in the time vs the interest rates - reflecting that (assuming that the savings interest income is lower than the cost of interest on the borrowings - I'm a pessimist) the longer you hold the money, the greater the return needs to be.Interesting thought experiment ...RegardsPickles Link to comment Share on other sites More sharing options...
Stan Streason Posted October 22, 2009 Author Share Posted October 22, 2009 [quote user="Tony F Dordogne"]You raise a mortgage on your property and tell the lender you want to - say - make improvements on the property. You fail to make the improvements, instead you speculate with the money.You have obtained a pecuniary advantage by a deception and are liable to get charged, especially with the mortgage climate in its present state, especially as you have speculated about doing so online in advance of doing so.That is a serious down side![/quote]Now thats the sort of unforeseen downside I knew must exist somewhere.However in my theoretical world I had not assumed that I would be saying I wanted to make improvements. I would be taking a loan with good security and ample proof I could afford the repayments. Does there have to be a reason given? Does a French lender care why I want the money? Link to comment Share on other sites More sharing options...
Pickles Posted October 22, 2009 Share Posted October 22, 2009 [quote user="Stan Streason"]Does there have to be a reason given? Does a French lender care why I want the money?[/quote]Usually, yes and yes, as it could affect the rate offered, in the same way as it would in the UK. It could even be against the policy of the bank to lend for such purposes on the retail side.RegardsPickles Link to comment Share on other sites More sharing options...
Stan Streason Posted October 22, 2009 Author Share Posted October 22, 2009 In originally making my post I went against one of my main principals (never ask a silly question before first checking Google).It looks like it may be possible but there again it is in the Daily Mail..http://www.dailymail.co.uk/property/article-1166106/The-euro-mortgage-holiday-house-paid-UK-home-loan.html Link to comment Share on other sites More sharing options...
Chancer Posted October 22, 2009 Share Posted October 22, 2009 Can someone explain that article to me please?How have they made £57000?How can they get a mortgage at 3% and get 4% on their savings? Or is the gist of it the same as the first posting? Link to comment Share on other sites More sharing options...
Pickles Posted October 22, 2009 Share Posted October 22, 2009 [quote user="Stan Streason"]http://www.dailymail.co.uk/property/article-1166106/The-euro-mortgage-holiday-house-paid-UK-home-loan.html[/quote]Some things in that don't quite add up. For example, they "live" in the UK but appear to have opened a Livret A (hence the 15K€ invested producing a "tax-free" income). I don't think that is actually allowed, but in any case they would have to declare it and pay tax on it in the UK, and once the 12 months is up they would be back down to the 1.25% or whatever Livret A is currently paying. They have exchanged a sterling mortgage for a € mortgage when it would appear that the only income they have is a £-denominated pension ...Eh?Pickles Link to comment Share on other sites More sharing options...
Stan Streason Posted October 22, 2009 Author Share Posted October 22, 2009 [quote user="Chancer"] Can someone explain that article to me please?How have they made £57000?How can they get a mortgage at 3% and get 4% on their savings? Or is the gist of it the same as the first posting?[/quote]It takes some lateral thinking and some adding of apples and pears but I think I can get close.A year last march they owned a property worth €400k and had a uk debt of £130k. At about 1.28 they had sterling equivalent net assets of £312.5k less £130k or £182.5kAssume a Euro mortgage of €300k which they translated at 1.07 (£280k) and paid off the uk debt.They then have net euros of 400-300 = €100k at 1.1 say £91,000Plus sterling of £280k-£130k or £150kso total sterling assets of £241k less last years balance of £182.5 leaving an increase in sterling assets of £58.5k I said I could get close.Of course if they had done nothing their sterling equivalent value would have increased as the sterling value of their house went up. But this is a more liquid "realised" gain as it has returned cash to sterling their main currency.Isnt it wonderful what you can do with numbers Link to comment Share on other sites More sharing options...
NormanH Posted October 22, 2009 Share Posted October 22, 2009 It is some years ago now but the first time I asked for a mortgage in France (thinking I could get a second mortgage à la anglaise) the person at the bank looked at me uncomprehendingly and said 'but why? You already have a house!' I didn't get the loan.The second time was to buy a house and L got a 100% mortgage (but for a principal residence, so I had to take a leaf out of MP's books and 'swing' my address)The third time I got a small 'second mortgage' but it required very detailed estimates from builders etc, and the bank wanted to inspact the payments.It may well have changed, but I suspect in the present climate it may well be tightening up again. Link to comment Share on other sites More sharing options...
Stan Streason Posted October 22, 2009 Author Share Posted October 22, 2009 [quote user="Pickles"][quote user="Stan Streason"]http://www.dailymail.co.uk/property/article-1166106/The-euro-mortgage-holiday-house-paid-UK-home-loan.html[/quote]Some things in that don't quite add up. For example, they "live" in the UK but appear to have opened a Livret A (hence the 15K€ invested producing a "tax-free" income). I don't think that is actually allowed, but in any case they would have to declare it and pay tax on it in the UK, and once the 12 months is up they would be back down to the 1.25% or whatever Livret A is currently paying. They have exchanged a sterling mortgage for a € mortgage when it would appear that the only income they have is a £-denominated pension ...Eh?Pickles [/quote]I am now looking at this in far too much detail but it actually says they live in France for 6 months a year. With a big house in France and a flat in the UK they could well be french resident. Link to comment Share on other sites More sharing options...
Pickles Posted October 22, 2009 Share Posted October 22, 2009 [quote user="Chancer"]How have they made £57000?[/quote][quote user="Chancer"]How can they get a mortgage at 3% and get 4% on their savings?[/quote][quote user="Stan Streason"]A year last march they owned a property worth €400k and had a uk debt of £130k. At about 1.28 they had sterling equivalent net assets of £312.5k less £130k or £182.5kAssume a Euro mortgage of €300k which they translated at 1.07 (£280k) and paid off the uk debt.They then have net euros of 400-300 = €100k at 1.1 say £91,000Plus sterling of £280k-£130k or £150kso total sterling assets of £241k less last years balance of £182.5 leaving an increase in sterling assets of £58.5k[/quote]I'm really putting FAR too much effort into this, but I reckon that they borrowed about 220K€ (and I doubt that a bank would have lent them much more given the probable level of income and value of their property)The reasoning goes like this:Looking at the € vs £ charts for mid Jan-mid Mar 2009, the range was around 0.06 €. They said that they gained £13K by waiting for 1.07€/£, so this £13K = 0.06x€x is therefore approx 217K€They pay off £130K mortgage = 139K€ They keep 15K€ in FranceThey pay 4.5K€ in feesThe rest (around 61K€) is transferred into £ = £57KThe £57K is just a crystallisation of part of the £109K increase in value of the French house as viewed in £.QED.Pickles Link to comment Share on other sites More sharing options...
Chancer Posted October 22, 2009 Share Posted October 22, 2009 I am very impressed Pickles.When I tried to work it out they ended up with £240k but owing €300k and I thought hmm what have I miseed? Like the value of their French dwelling [:)]I think that I am going to remortgage my UK properties to the hilt and convert the money to Euros, then do the same with my French property and convert the money to sterling, that way I should be covered whatever way the exchange rate goes.Oh and run away with all the money to somewhere where no-one will find me like Spain [;-)] Link to comment Share on other sites More sharing options...
sunny Posted October 23, 2009 Share Posted October 23, 2009 Stan,It sounds like a good idea, if you can get the mortgage. You are also hedging your bets nicely - if the euro becomes stronger, your property will be worth more in sterling terms; if the euro devalues, you have already taken a nice chunk out of your equity and converted, so you have minimized the impact of devaluation.Very nice! It seems well worth the effort. There are some transaction costs obviously, but I think you could get a good rate in sterling to offset that. The euro mortgages are currently at 3.5 to 4% and I have seen sterling bonds at 4.5 and 5%, which should even out the cost of borrowing in euros. Link to comment Share on other sites More sharing options...
Recommended Posts
Please sign in to comment
You will be able to leave a comment after signing in
Sign In Now