Anyone considering buying a property abroad this year should think very carefully about where to borrow their money. With property prices escalating every month in Ireland there are many people who are looking to locations such as the UK, Spain and even Florida to purchase holiday homes or properties as investments.
But for each of these locations, there are different issues when it comes to where you should borrow the money.
Spain, for example, is now in the euro and there is thus no exchange rate exposure between the countries. Thus, the decision would come down to where you can get the cheapest rates and the ease of convenience of dealing with the lender.
Official interest rates are of course the same in Spain and in Ireland but there are wide variations in mortgage rates. Ireland has some of the highest rates for borrowers across the 11 countries in the euro and it should be possible to source cheaper finance in Spain, according to Jim Power, chief economist at Bank of Ireland.
The same should hold for all the other 10 countries in the euro. For example, Irish Permanent charges 5.9 per cent for a five-year fixed-rate loan, while Deutsche Bank charges 4.28 per cent,
However, the same cannot be said when buying in London or elsewhere, such as Northern Ireland. Anyone who has Irish earnings would be facing an exchange rate risk by taking out a sterling mortgage and would be gambling on the future direction of sterling on the money markets.
If sterling were to fall heavily, your mortgage would become much cheaper, Mr Power explains. On the other hand, if sterling were to rise, your mortgage would become far more expensive.
Official interest rates are very different in this State than in the UK, with ours standing at 3 per cent and the UK at 5.5 per cent. However, the mortgage market there is so competitive that there is often little difference in the price available to borrowers. On top of that, UK rates are expected to fall further, particularly if sterling starts seriously heading for the single currency.
According to Mr Power, many economists believe sterling is seriously overvalued and the likelihood is that it will fall by as much as 10 per cent over the next year or two. That would effectively mean a 10 per cent drop in the value of your mortgage over that time, far outweighing any interest rate difference.
In addition, if sterling were to enter the single currency, its rate has already been effectively set by our own entry rate at DM2.41. Sterling is thus likely to go into the euro at around DM2.50, from a level of over DM2.85 at the moment.
So if you believe that sterling will enter the euro, it is probably worth your while taking pout a sterling mortgage but remember it is a risk. No one can accurately predict what the money markets will do and they are notoriously volatile creatures.
The other advantage of borrowing in sterling is that many of the Irish lenders have branches in the UK. This means you can take advantage of existing relationships and there should not be any doubt about credit worthiness. All the big Irish lenders have branches in London and most are lending and increasing amount to Irish-based borrowers.
However, if you are thinking about a holiday home in Florida, the logic is nowhere near so neat. Anyone who could accurately predict the direction of the euro and the dollar would already be retired on their earnings; and not forgetting the dollar is one of the most volatile currencies.
Mr Power points out that there are at least broad parameters which can be looked at when thinking about sterling, such as likely euro entry, but the same does not hold true of the dollar.
On top of the exchange rate risk, US interest rates may be set to rise, increasing again the cost of borrowing there. As Mr Power says, it is quite unambiguous that anyone thinking of buying US property should borrow at home. The only exception is, of course, anyone working for one of a multinationals who is paid in dollars.
