Friday, May 8, 2009

Why choose interest only for your Spanish mortgage

I wrote an article today to post on some article directories. Was rather pleased with myself so thought I would blog it here as well;

If you have a property in Spain with a Spanish repayment mortgage, ask yourself if you have recently been worried about any of the following :-

The credit crunch
Interest rates and mortgage rates
Currency Exchange rates
Property price crash
Banks going bust

If none of the above has concerned you recently, congratulations - you can continue moving through life with your head in the clouds and are probably beyond saving. Just kidding - if you are unconcerned about these things, good luck to you.
In reality, almost everyone has been touched by the financial meltdown, but we aren't completely helpless. If you have a repayment mortgage in Spain, you can take reasonable steps to protect yourself from the economic uncertainty.

The credit crunch
This phrase has become so ingrained in our lives in the last few months, that it seems to now cover a whole range of problems and disasters that have been occurring. In basic terms, the credit crunch is affecting your Spanish bank in some regard, and is probably worse than they have admitted. This is affecting their ability and willingness to lend money on decent terms. Go ask them if you can modify your mortgage and the manager will stop crying into his con-leche and laugh you out of the (empty) branch.

Switching to an interest-only mortgage will ensure that your monthly commitment is as low as possible. Whatever financial disasters occur, you only have to pay the interest amount each month. Keep the savings aside for a rainy day.

Interest rates and mortgage rates
Base interest rates in the eurozone are on the floor. Down to 1% in May 2009. Great news for my Spanish mortgage you say. Not so fast. It isn't quite that simple.
Your mortgage is probably based on the annual Euribor, which is 1.7%, because the banks are still uncertain about lending to one another over a 12 month period. Then you have the bank margin of at least 1%, so you are paying 2.7% as a best case. But very few people are. If your annual rate changed in November 2008, then you are likely to be paying about 6% until November 2009. If you are on the IRPH rate, an average of bank rates, then you will be paying a rate that is much higher than the Euribor and is falling much more slowly.

Switching to an interest-only mortgage could get you on the much lower monthly or quarterly Euribor rates. Take advantage of the low Euribor now, until the inevitable increase in rates as the financial systems settle down and inflation starts to reappear in the economy.

Currency Exchange rates
You bought the property when 1 of your British pounds bought nearly 1.5 of those new fangled Euro thingies. The mortgage rate was low and the payments were easy when the pound was strong. Now it's almost one-for-one and each pound only buys a bit more than one euro. That hurts.

Get onto interest-only. It's the only way to minimise the amount of pounds you are converting to euros. Save some sterling elsewhere and pay off a lump in the future when the pound is stronger. But don't keep sending pounds to pay back your capital amount when the euros are so damned expensive to buy.

Property price crash
It's a disaster, Spain is full of empty properties and they are all worth less than a used Ford Cortina (remember those - a Ford curtain. Very odd)
Actually, it isn't going to be so bad, as these things always go in cycles. But it might be a bit sticky for a few years. You didn't buy the property in Spain to make a fast buck though, did you? So lets assume you are going to hold it for 5-10 years.

Why switch to interest only though? Well, if you have negative equity at the moment, then you are paying back capital owed that is more than your asset. That just seems wrong. Ok you are effectively paying back money and saving, but there are so many reasons against that at the moment. Pay only the interest. You have a property to use or rent out. No redemption penalties mean you can repay a chunk when you are feeling flush and it feels right again.

Banks going bust.
Some other bank is always going to pick up the loan book, so you can't get away with it if your bank goes bust. Imagine that, wouldn't it be cool if your mortgage liability dies with the bank. Sadly it's not going to happen. What might happen though is that there is a big disruption in the Spanish system, that hasn't happened yet. There is going to be blood, and there will be a level of consolidation never before seen in Spain. What won't accompany this turmoil is decent products and service. Already the banks are so unhelpful to existing clients. Remember how they fell over themselves to lend to you in 2004. Those days are gone my friend.

How about some UK banks that have already been through the pain of the credit crunch and forced mergers, and are starting to come out the other side. You can have more innovative products, and customer service that you can shout at in English. Pay interest-only and you can sit pretty watching the Spanish banks collapsing.

Not nice when it happens, and you probably won't see it coming. If you are made unemployed, and it is on the rise, then how do you pay your repayment mortgage ?
Unemployment affecting others can also impact you. The uneployment rate in Spain is heading rapidly for 20%. This will hurt the whole economy in Spain, and the strain will be felt by the Spanish banks, who will have to get more money in from their remaining solvent clients.

If you are only paying the interest on your mortgage, then you are more likely to get through an unemployed period yourself, and your exposure to the problems of general unemployment will be minimal.

So, lots of problems that can affect your Spanish mortgage, and one simple solution available that allows you to take as much control as possible in the current situation.

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