My goodness, just when you thought you’d heard it all, along comes an opinion to shock you! Apparently there are those in the market who believe that because the value of the pound has slid so decisively against the euro, and because British house prices have fallen even further, now would be a great time to remortgage a property in France to buy in the UK!
Surely this is the way madness and personal financial crisis lies, and it’s an opinion that we at Degtev certainly don’t share. Neither does Iain Martin of City Wire who’s also been quoted as calling the idea ‘madness’ on the Homes Overseas website. If you can’t quite see why we’re so shocked, in this article we’ll break down some scenarios for you and highlight a few flaws in the proposed property investment plan.
It’s true that currency traders the world over are being more than a little heavy handed in their bashing of the Great British pound. The currency has slid noticeably against many of the world’s leading currencies and this is a fact that anyone who’s been on holiday this year outside the UK will concur with. If you’ve just bought dollars with your pounds, Turkish lira or euro for example, you’ll see you bought far fewer this year than you did last year, and when you arrive overseas you’ll have a feeling that suddenly everything is more expensive. The truth is, our currency has been devalued because the state of the British economy is far from pretty.
What this means for those with homes overseas particularly in eurozone nations such as France, is that effectively, the value of the home owned has risen because the value is totted up in euros, and each euro now buys more pounds. The idea being bandied about by some, (no names mentioned), is that owners of property in France cash in on this effect, raise a mortgage against their French home or remortgage it, and use the cash raised to buy British property which is priced in the weaker pound.
Simple idea – simply flawed!
For a start, we need to really assume that the person mortgaging their French property will raise the mortgage in euros. And that repayments will be made in euros…and for the majority, the mortgage payments will actually be funded by pounds! So there’s the first flaw in the plan because it will now effectively be more expensive to afford the mortgage! The next flaw is perhaps more significant because you could perhaps assume that the Brit with a property in France also lives and works there and earns an income in euros with which to pay back their euro denominated mortgage…
The next flaw relates to the value of British property – yes house prices have fallen in the UK, but they have only just started to fall. Who in their right mind honestly believes this is a temporary bilp? To again quote Mr. Martin from City Wire, buying assets in a falling market is like “catching a falling knife,” and there is nothing whatsoever to suggest that the value of British properties will likely rise anytime soon.
The final flaw in this plan has to do with considering the value of the French property that has theoretically been remortgaged – economies the world over have been or are about to be impacted to a lesser or greater extent by the US fiscal crisis. This is because some nation’s banks have lent money to US lending institutions like now seemingly bankrupt Fannie Mae and Freddie Mac, others have copied the US bank’s greedy and immature lending policies just like British banks did and they have overexposed themselves to the so-called ‘sub prime’ market. I.e., they have ‘lent’ money to people who cannot repay it. And the final fundamental way nation’s economies are being impacted by the US is because they export to the nation and it can no longer afford their exports or is paying less for them for example. So, this means that it is not just in the US and UK where house prices are falling, ever falling. Who’s to say that the value of the French property that has just been mortgaged won’t fall – and if it does, doesn’t that thrown the borrower into a situation where they are now in negative equity and therefore dangerously exposed?
Hopefully you can now see why we are so adamant that mortgaging a property in France to buy in the UK for purely profitable investment reasons is unwise at best and totally insane at worst!