Coronavirus crisis: Mortgages and buying overseas property
In the current coronavirus climate, many are unsure about whether to invest in overseas property and when a sense of normality will return to the international property market.
Technically, it is still possible to purchase property abroad and in the UK, assuming that the relevant bodies are open for business. However, the process has become more difficult due to lockdown restrictions and business closures.
Aside from concerns around making a property investment, reports are revealing that banks in the most popular investment destinations are refusing to offer payment holidays to overseas owners. Instead, they are choosing to help nationals first as many banks have stated second-home buyers and investment properties aren’t eligible for repayment payment holidays.
Foreign exchange market volatility is also causing concern around investing in overseas property as the value of money has become more prone to day-to-day currency fluctuation.
Once the coronavirus crisis has passed and normality returns, anxiety and fears surrounding economies will ease but buying an overseas property during the pandemic has also created avenues of opportunity.
Though the landscape of the global property market has altered, there are few key factors to consider that may aid your overseas property purchase or mortgage repayments during this climate.
Slashed interest rates reduce mortgage payments
Central banks have lowered interest rates to support their relative economies through the coronavirus crisis and, as a result, mortgage cost repayments have also reduced worldwide.
The Bank of England (BoE) has cut interest rates down to 0.1%, the US Federal Reserve (Fed) has slashed rates to 0.25%, and the European Central Bank (ECB) is operating on interest rates between the -0.5% and 0.0% margin.
Although mortgage lenders are asking buyers to make a larger initial deposit if you have the capital available, slashed interest rates present an advantageous opportunity to secure a valuable deal on your overseas property transaction.
Using the Bank of England rates as an example, if you own a GBP 300,000 interest-only mortgage and your current interest rate at 2%, drops to 0.1%, your monthly payments would decrease from GBP 500 to approximately GBP 25.
Tracker mortgages tend to follow central bank rates, and so borrowers on variable or tracker rates will benefit from reduced interest rates immediately.
Most buy-to-let mortgages are also lent on an interest-only basis, as that is the most tax advantageous way for landlords to borrow. According to The Guardian, there is a widely held principle that a 0.5% interest rate cut will save approximately GBP 40 a month for every GBP 100,000 borrowed.
If you’re ready to invest in overseas property, you can take advantage of these competitive rates. In previous years, when interest rates were slashed to unprecedented lows, many banks started offering fixed-rate deals below 1%.
Protection against foreign exchange market volatility
If you receive regular income from your overseas property, exchange market volatility will directly impact the amount of money you receive in your bank account each month due to dealing with two, or more currencies.
Over the last month, the British pound to euro (GBP/EUR) exchange rate has swung from highs of EUR 1.18 to lows of EUR 1.14, and amid the current crisis, economists expect further market instability.
Halo Financial is a specialist currency exchange provider authorised by the Financial Conduct Authority (FCA). Through careful management, we can minimise the risks associated with foreign exchange whilst helping to maximise on opportunities that volatile exchange rates can provide.
Consider using a forward contract or automated currency orders, such as a limit order, which are advantageous when trying to navigate past the risks associated with fluctuating exchange rates.
A forward contract is particularly useful if you are concerned that the exchange rates between your chosen currencies will weaken, or you need to budget for a future currency transfer.
Forward contracts allow those involved in the international money transfer to agree on a fixed exchange rate, up to two years in advance of exchanging your chosen currencies. During this set period, the buyer or seller will be protected from adverse fluctuations in currency prices.
Limit orders allow you to buy and sell currencies from your foreign exchange provider at a specified target exchange rate. Your currency provider will assign you with a dedicated account manager, who will contact you when that exchange rate or a more desirable rate becomes available.
Depreciation in pound Sterling is advantageous for overseas buyers
If you’re an overseas buyer or an investor wanting to purchase a property abroad in the UK, the pound’s (GBP) current vulnerability means that now is the perfect opportunity to buy.
Although the UK has introduced a new stamp duty levy, competitive exchange rates against pound Sterling (GBP) continue to make the UK an attractive option for investment.
The euro (EUR), Japanese yen (JPY), US dollar (USD), Canadian dollar (CAD), Australian dollar (AUD) and several other major currencies have all appreciated against the British pound (GBP) amid the coronavirus crisis and Brexit uncertainty.
The British pound’s (GBP) current vulnerability presents an ideal opportunity for foreign buyers by reducing the cost of overseas property in the UK.
If a US national bought a GBP 250,000 property in the UK five years ago, this would have cost around USD 362,500. However, the current US dollar to British pound (USD/GBP) exchange rate is GBP 0.71 , meaning that today a house of the same price would cost USD 347,292, a significant difference.
So, despite the uncertainty that now exists within the international property market, investing in UK property during the current crisis has several advantages.
It is also worth noting that as property investments tend to be long-term projects, once the pandemic passes, pent up demand in the international property market will likely release. Sellers are then likely to gain a significant profit on their overseas property after benefiting from low-interest rates and competitive exchange rates.