Sunday, April 17, 2011

British expats forced to sell up and come home

British expats and those with a second home abroad are being forced to sell up and leave thanks to rising mortgage rates and slumping sterling. More than 300,000 second-home owners with euro-denominated mortgages are suffering from the first European interest rate rise since July 2008, which has caused rising mortgage rates and a further fall in the value of sterling against the euro. The euro has strengthened since the rate hike was announced, while this week's weaker-than-expected inflation figures in the UK have made a rate hike here seem more unlikely, depressing sterling. If you changed £100 this week you would receive just €112 before the rates applied by brokers, compared with €115 last month or €119 in January. The weakening pound has proved too much for many expats. Adam Jordan, senior currency expert at money transfer specialists Moneycorp, said that the company had seen a 40pc rise in the number of people repatriating large sums of money to the UK during the first quarter of 2011 compared with the last quarter of 2010. He said that these people were selling properties and coming home, and that their problem was likely to get worse, with the European Central Bank (ECB) expected to increase interest rates again in September of this year. "The markets are expecting a rate increase in the UK in October, but this is more uncertain because we haven't seen the Bank of England response to this week's inflation figures," Mr Jordan said. "It's possible that the gap between interest rates in the UK and abroad could widen further." He said that many of those repatriating their money had only recently managed to sell their homes after the property crash in Spain. Those with second homes abroad and pensioners living abroad but surviving on savings income and a sterling-denominated pension will be the hardest hit by these rate changes. For them, this is a double whammy because the rises tend to strengthen the euro against the pound and they will also be paying higher mortgage costs. Figures from Smart Currency Exchange show that the average increase in mortgage repayments after the ECB rate rise will be £1,750 a year. Rates are expected to increase further to a possible 1.75pc. Mr Jordan said he has seen an increased number of clients choosing to remortgage their main home in the UK in order to pay off the mortgage on their second home, and thus avoid making regular payments in euros. Charles Purdy, director of Smart Currency Exchange, said that he was advising customers to be "very realistic" about the rates they will get on sterling. "If they have a large mortgage, the liability will have gone up in sterling terms," he said. "They need to realise that the size of their mortgage has effectively increased, and there is inflation in Europe, too, so that makes it even worse. People who are buying abroad now are more worldly wise than they were a few years ago, but I am telling them that they need to budget for €1.10 to the pound rather than €1.20 or €1.30." For many, the rise in rates combined with slumping sterling has put paid to dreams of living in France or Spain. A survey from website showed that interest in acquiring a French property was slumping due to an increase in living costs and weaker sterling. David Vindel, a senior public relations consultant from London, is one of those who has been hit by the changes in sterling. He has bought two properties in Spain to rent out during the past five years. "They were meant to be good investments, but things have turned out rather differently than I expected," he said. He chose the two properties, one in Valencia and one near Madrid, as infrastructure changes made these areas seem good places to be. However, his mortgage costs have increased by £150 a month per property since he bought them, and because of slumping property prices in Spain he can't sell them either. "I've had to dip into savings in order to transfer more money to pay for my mortgages," he said. Like many others in the same position, Mr Vindel has considered buying fixed-rate currency, instead of relying on the vagaries of the market by taking the rate that is available to him on the day when he is sending his money. A money broker will allow you to fix your exchange rate for up to two years, giving you greater certainty about the cost of the transactions you make. If the exchange rates move in your favour during the time of the fixed rate, you won't be able to take advantage of this, but obviously if they move adversely, you won't suffer. The difficulty is that you may get a shock after two years when you come to get another currency deal, but at least you have had certainty for a period. These fixed rates are called forward contracts. It is also possible to use more complex foreign exchange tools to give you the option (but not the obligation) to buy when a currency reaches a certain level. Source

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