Hypothetical question – mortgages and Euro

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This topic contains 19 replies, has 6 voices, and was last updated by Profile photo of Anonymous Anonymous 4 years, 5 months ago.

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  • #56239
    Profile photo of Anonymous
    Anonymous
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    Hi all.
    With all the articles about the financial crisis in various EU countries, and the suggestion that some countries may leave the Euro (or that the Euro falls away completely) I would like to know how it would affect a mortgage holder?

    For example, say a person has taken out a mortgage for 100K Eu and the country (we’ll say Spain since this is the Spanish Property Insight forum) then leaves the Eurozone – would this be a good thing or a bad thing for the mortgage-holder? Would his monthly payments go up or down? And would it make more or less of a difference if the the financial institution was in Spain or outside of Spain?

    I welcome those with experience and understanding of this to give input – note that this is not a “should I buy property in Spain” question though, so PLEASE DON’T answer with “don’t take a mortgage on Spanish property because the market will fall” as this would not be particularly enlightening and there are plenty of those topics already! 🙂

    Thanks in advance!

    divv

  • #104687
    Profile photo of Anonymous
    Anonymous
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    As I see it and I dont have all the info & what Spain would do if Spain leaves the Euro. One thing is for sure that it will devalue its currency or market will force the devalution. The devalution will bring a new peseta rate/€, £,$ rate.

    Depending on the conversion rate applied of the new peseta by the Bank of Spain, the devalution & the financial market will find a new level against major currencies. Besides because of the devaluation your property will also be reduced in value in £ terms and not to mention what will the £ be worth at the time against other Currencies.

    In theory & because of the devaluation the properties should become cheaper. Spain being Spain the property prices will be increased accordingly. wheter anybody buy’s or not. As by that time the property glut should have been reduce to a very large extent.

    It will be intresting to see what take other forum users will have.

  • #104695
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    Anonymous
    Participant

    Thanks shakeel for the input but I’m not so much asking about the purchase prices as what would happen to monthly repayments.
    The scenario assumes someone ALREADY has a property and mortgage..

  • #104702
    Profile photo of Anonymous
    Anonymous
    Participant

    Fair enough. However all these things are interconnected. Again it will depend on the devaluation & the exchange rate . I feel the matrix will remain the same. If & when the
    £ improves you will get more for your new peseta therefore in £ terms you should be better off on the monthly payments and the capital amount borrowed i.e. the mortgage.

  • #104705
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    Anonymous
    Participant

    Thanks.
    Anyone else have some thoughts?

  • #104706
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    Anonymous
    Participant

    It’s complicated, but I’ll give it a go.

    Assuming Spain went back to the Peseta, and your mortgage was then denominated in Pesetas, you would be laughing all the way to the bank. The Peseta would devalue heavily against the Pound, leaving the value of your mortgage in GBP much reduced. I guess interest rates would go up but it wouldn’t matter much to you.

    On the other hand, if your mortgage stayed in Euros, you would have a problem. Your debt would be much bigger than the value of the collateral, which pretty much sums up the situation Spain is in right now.

  • #104708
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    Anonymous
    Participant

    So based on your reply Mark, would you think it would make a difference if your mortgage was at a Spanish bank or a bank outside Spain?
    Or do you think the Spanish banks might also keep their loans in Euro denomination?
    Theoretically of course!! 🙂

  • #104709
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    Anonymous
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    Thinking about it, all debts taken out in Spain would become Peseta debts. What’s the point of leaving the Euro if not to wipe out unsustainable debts?

    Might not apply with a loan taken outside of Spain.

    But personally I can’t see how Greece or Spain or any country in the Euro can get out. It would be such a disaster they are better off staying in – the lesser of 2 evils.

  • #104710
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    Anonymous
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    In addition to what Mark has said. The loan will be in Spain as the collateral is in Spain. Banks dont like cross border collateral.

    Of course if you have taken an equity withdrawl in UK. It will not have any relevance as your equity withdrawl is in Sterling.

  • #104712
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    Anonymous
    Participant

    Thanks both.. interesting exercise….

  • #104713
    Profile photo of GarySFBCN
    GarySFBCN
    Participant

    I’m not a lawyer, but I enter into a contract in euros, doesn’t that contract have to be re-negotiated if the contractor wants to change the terms – in this case, the currency?

  • #104715
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    Anonymous
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    @garysfbcn wrote:

    I’m not a lawyer, but I enter into a contract in euros, doesn’t that contract have to be re-negotiated if the contractor wants to change the terms – in this case, the currency?

    Certainly, if it is little old you versus the bank. But if a country defaults, what are you going to do?

  • #109088
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    Anonymous
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    In the event of a meltdown in Spain leading to an exit from the euro, there seems to be agreement that the new peseta would plunge out of sight. In this case, surely, the Spanish bank would keep all its loan ASSETS in euros and covert its LIABILITIES into pesetas. Or am I missing something?

  • #108888
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    Anonymous
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    In the event of a meltdown in Spain leading to an exit from the euro, there seems to be agreement that the new peseta would plunge out of sight. In this case, surely, the Spanish bank would keep all its loan ASSETS in euros and covert its LIABILITIES into pesetas. Or am I missing something?

  • #109090
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    We know banks will try anything, but they wouldn’t get away with that on domestic loans originally denominated in Euros (rather than Swiss Francs, or some other exotic loan product).

    In my opinion.

  • #108890
    Profile photo of Anonymous
    Anonymous
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    We know banks will try anything, but they wouldn’t get away with that on domestic loans originally denominated in Euros (rather than Swiss Francs, or some other exotic loan product).

    In my opinion.

  • #109092
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    Anonymous
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    Thank you for the reply.
    But that raises the question of how on earth the local mortgagors – who would be earning pesetas after the changeover – could ever hope to repay the loans, in euros, which they are struggling to pay now. If the peseta (or, in the case of Greece, the drachma,) were to fall in value by, say, 50 % the balances due on the local mortgages would effectively increase by 100%.
    I wonder if it is politically possible for a country to leave the euro and not, then, convert its domestic loans and mortgages into local currency liabilities. Of course non residents could well be treated differently.

  • #108892
    Profile photo of Anonymous
    Anonymous
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    Thank you for the reply.
    But that raises the question of how on earth the local mortgagors – who would be earning pesetas after the changeover – could ever hope to repay the loans, in euros, which they are struggling to pay now. If the peseta (or, in the case of Greece, the drachma,) were to fall in value by, say, 50 % the balances due on the local mortgages would effectively increase by 100%.
    I wonder if it is politically possible for a country to leave the euro and not, then, convert its domestic loans and mortgages into local currency liabilities. Of course non residents could well be treated differently.

  • #109673
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    Anonymous
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    I have taken an interest here because a flat owner in our residence has a Spanish mortgage with Banco Popular and she told me she might have to leave her flat but was not clear even though she has been paying her mortgage so far up to date -so I was puzzled. Until today- an item on Bloomberg was saying Spanish bond yields are rising and it occurs to me that the possible matter is that as a result Spanish mortgage rates are rising putting more owners in difficulty. Is there evidence of this recently and is there a link between the bond yields? I am not sure if many Spanish have fixed rate contracts as of course is so in USA and for limited periods in UK.I write this as may be of interest to others. It would also suggest a bumpy prospect. The peseta might be blue sky ! Capital values in sterling terms will show a big loss but demand for property will zoom and the economy will regenerate with a lot of inflation. But in the meantime great holidays for UK people until sterling is downrated -maybe sterling will need to partially devalue. After all is not UK run on Buy to Let from Prince Charles down paid for out of Housing Benefit !!! Anyone who wants to employ someone to work in a ball bearings factory cannot afford to pay enough wages unless they employ Poles or other immigrants living 4 in a room sharing the rent and paying their way !But we are not yet going to have new peseta -the Euro may linger on maybe weakening but mortgage rates going up and the pain persisting?

  • #109779
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    Anonymous
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    I am continuing to receive information that Spanish banks are increasing mortgage rates and that some people are re-negotiating their monthly payments and that this is a fairly general problem in Spain. Of course UK rates have been rising too but not for savers of course !!!!. I noted on Bloomberg today that Spanish bond yields have come down again from over 7% to 6.5%. But this just goes to show that returning to the peseta would make things more difficult as interest rates would be higher most likely and it could cause a wave of repossessions. So Spain is better off with a bit more deflation and some measures to alleviate unemployment in infrastructure work that is necessary.

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