Who is affected by the drop in Sterling
The drop in Sterling since the Brexit vote to leave the EU, and the large decline seen last week after the Conservative party conference will affect those looking to buy abroad.
Buyers in Spain committed to a purchase already who have passed the point of Private Purchase Contract will be the first to be hit.
If a contract is already signed then 10% will have been passed over and the buyer is obligated to buy or risk losing this deposit. Some of these purchasers may have been cash buyers and will now find that the sterling needed to complete is in excess of what they budgeted for and are looking to take out a Mortgage in Spain.
For a property of € 200k if the budget was arrived at based on a 1.25% exchange rate the new exchange rate of 1.11% will add a further gbp 20k to the purchase cost.
Can a Spanish Mortgage mitigate some of the cost
A possibility of mitigating the current collapse of the pound would be to take a mortgage in Spain.
Whilst there are costs attached to this which will work out at around 4% of borrowings interest rates are very low in Europe currently and it is possible to fix the rate for up to 20 years from as low as 2.4%.
Each month that the payments have to be transferred the buyer will of course have fluctuations each month based on the exchange rate when they make the transfer but it does allow for the buyer to manage the extra cost more effectively. If sterling recovers the mortgage holder can decide whether to continue running the loan or pay off large chunks or all of it.
Early repayment penalties are a consideration so if the mortgage holder wants maximum flexibility to overpay when sterling recovers then a variable rate product may be a better option.
Reservation fees
The second group of buyers who will have to consider their options are those who have offered on a property but have not reached the point of purchase contract. These buyers will have the option to withdraw from the purchase possibly only losing the much lower reservation fee.
A maximum loan in Spain of the 70% afforded to non fiscal residents of Spain may also however be an option to allow them to continue with the purchase if they chose to do so.
These individuals may also be negotiate on price with the seller particularly if the seller has to move funds back to sterling as the drop will have benefited them the other way round.
Commercial impact on Spain
The third sector to be hit by the drop in sterling will be sellers,agents, mortgage advisers and Banks in Spain.
There will no doubt, amongst UK buyers in Spain, be some backlash and nervousness about proceeding with a purchase in Spain until the dust settles on Brexit and sterling finds a more appropriate level.
Prices in most of the coastal areas favoured by the non resident buyers are at their lowest for many years so the issue of sterling has to be balanced against the current prices that can be achieved.
Raising a loan to purchase in Spain
A Mortgage in Spain does mitigate the fluctuations on foreign exchange and a fixed rate takes away the double variable hit of possible rising interest rates and FX drops.
Spanish Banks have been concerned since the Brexit vote about the impact on the pound and have taken this into account when underwriting and risk assessing UK borrowers.
With what happened last week this is going to continue. Banks in Spain work on affordability ratios looking to see that no more than around 35% of an applicants net income is utilized for the payment of all debts.
This ratio is affected by what exchange rate the banks elect to use and can have an impact on what can be borrowed. The drop last week to the lowest levels for many years will make the underwriters more cautious when assessing applications of UK residents. It is perfectly possible that the lenders may start to use a worst case scenario of the pound being level with the Euro.
Mortgage applicants who are tight on income and toward the top end of affordability ratios may find a loan is not forthcoming.
Fiscal approvals the way forward
In these volatile times getting a fiscal approval in place even if you think you may be a cash buyer could be a very sensible way forward so you have options and no your bottom line budget before passing over any non refundable monies.
A fiscal approval only takes time in terms of the mortgage application process and allows a buyer to hedge their bets without feeling the need to stop looking at a purchase all together.
