Paying off an existing mortgage

In reply to Mike and Helen,I would suggest you also have to look at the inteerst rate you pay for your mortgage.

Mine is variable.I took out my my mortgage 3 years ago and my interest rate was around 2.25%.Today it is 3.6% which means I am paying considerably more in interest to the bank today than 3 years ago hence the incentive to pay off (at least part) of the mortgage.

elainG is quite correct in her advice of never taking anything for granted.

Friends of mine crippled themselves in UK to try to get rid of their (what they originally thought was a reasonably  nominal morgage)  - despite the fact that with the depreciation of the value of every single property in Spain, they were actually in negative equity..        They were charged a 1% early-repayment fee (which they paid), but were then advised that the cost of the Land Registry (another €800) also had to be footed by them.  This they haven't, and are most reluctant to pay - at least not yet.

The bank that they were initially with, has now been absorbed into another bank (together with at least another 3 banks) and all of their colossal loss-making property portfolios, with them.   The main bank now has an unbelievable portfolio of bad debts.   As all of the 4 banks that were absorbed also were funding separate developers, those bad debts also had to be accepted.      

In one development that I know of, more than 50% of the properties funded by the bank haven't been sold, and some 200 additional plots of land are just sitting there.      The properties are  now being offered at 25% of the original sale price, and the plots of land haven't even got a price.      On this development, the banks involved were "in" for some €50 Million, and the likely return isn't even likely to achieve 10 million.

Multiply that sort of scenario (which is extremely common) out a few hundred times, and that goes some way to explaining why the banks are up that well known Creek. 

I personally would sit tight and take no action whatsoever about repaying a mortgage.    There's still far too much uncertainty about what will eventually happen.                Some of the banks are trying to offload their mortgages to (mainly German) investment companies at ridiculouslylow prices, just to try to regain some solvency.

My own opinion is that any financial dealings in Spain as it is at the moment, is like playing Russian Roulette with a belt-fed machine gun instead of a revolver with juts one chamber loaded.              There's some one million foreign mortgages held in Spain, so just sit tight and wait and see which way the wind blows.

Thank you all for your advice and opinions. Yes I wish we all did have a crystal ball. Im still undecided as to what to do. Pay off some of the mortgage or wait and see what happens to the euro. Any Clairvoyants out there???.

we are all feverishly polishing off our crystal balls ...... so much depends on what happens elsewhere in the world Linda .... one of the downsides of a true global market is that China sneezes, America catches a cold and Europe ends up with pneumonia

One thing no one has mentioned is regarding inheritance tax. I believe as a non resident you are far better off paying off your UK mortgage rather than the Spanish one, as the reliefs when a partner dies are far better in the UK rather than Spain. So as far as I know you are better to stay in debt in Spain, especially if you are elderly. Someone correct me if I am wrong.

Regarding the banks, they are the same the world over. So many people look on them as their friend. They are not your friend. They are there to make money out of you. What other business would you hand over £100 of your money ( savings ) and to borrow that same money back it costs you £ 105. They know they have us where they want us. If you borrowed £ 200,000 at 5% over the term of the loan, you would pay over £ 150,000 in interest over a 25 year period before deductions for inflation.

Regarding your mortgage if Spain left the Euro, I believe all mortgages also have a Pesata rate that is a fixed rate equivilant to the Euro rate taken at the time of the loan so your Euro mortgage balance would be converted back to the Pesata at this rate. If it was me running the Euro zone, I would do a deal with Ireland, Portugal, Italy and Spain, and boot out Greece. This would settle the markets and teach the Greeks in future to pay their proper taxes and teach their politicians not to lie through their teeth in future like they did to join the Eurozone. Why are these politicians not behind bars. The misery that they have caused to 10's of millions of people.

Re the succession tax (IHT) Westport you are quite correct that the situation is more favourable in the UK to Spain. However the great likelihood is that most non resident home owners in Spain wont fall into the IHT threshold anyway but in principle your thoughts are correct.

As to the rest of it and the situation with Greece......if we lived in an ideal world we would have world peace, poverty would not exist and there would be no starvation in Africa ........ and I would have won the Euromillions jackpot last week ;-) ...... it is what it is and it will take more than the current bunch of numbnuts in Brussels, Westminster, Madrid, Dublin, Lisbon, Athens etc to resolve the worsening situation ...... have said it before but were it not for nuclear weapons I reckon we would have seen WW3.

I have a question Smiley.

If current debt levels are a problem and IHT rules incentivise debt then shouldn't those rules be revised? Many foreign nationals were incentivised from the outset into far greater debt to offset IHT/CGT etc which allowed prices to rocket, so doesn't this need to be curtailed? If mortgage holders were provided with incentives to pay off their mortgages or significantly reduce them (via lower interest rates for lesser amounts, removal of penalties and reduction in IHT relief), then presumably the Banks would acquire more liquidity in the process. These monies could then be loaned to new businesses which would help to diversify the economy and improve growth. A shift of monies from domestic to commercial enterprise. Domestic properties would then regain more realistic values (since large mortgages would be curtailed) and new small business ventures could expand. Would this work? Or is there too little money available in the domestic market to expect debt repayment of this nature to occur?  (Mortgage brokers would still acquire commission but from a different sector of the market place).

As this thread is revived, and I was challenged in a reply to my earlier posting to look at my interest rate, here is an example of not paying a mortgage off if you beleive that the Euro exchange rate will deteriorate against the pound;

For example,

In July 2011:

Mortgage 110,000 Euros, Exchange rate: 1.1 (it was lower than this) Cost to pay off: £100,000.

In July 2012:

Mortgage 110,000 Euros, Exchange Rate: 1.25 (has been better then this). Cost to pay off Mortgage £88,000.

Mortgage Payments at 3% (at 1.1, for simplicity) 3,300 Euro's, £3,000. (would be lower than this due to improving exchange rate during the year.

If the Mortgage was interest only, the cost in pounds to pay if off in July 2012 was 88,000 plus the Interest of £3,000, £91,000.

I.E £9,000 more in your UK bank account than if you paid it off in 2011, a far better return than if you invested it.

If the Mortgage was over 25 years, paying capital, there would be about 4,400 Euro's paid off costing less than £4,000.

Yes these sums are rounded but they do illustrate my basic point not to put money into a weakening, unpredictable economy.

Mike.

Hi Ads in response to yours - thats a question for Govt and not me. What you are in effect saying is that Joe Bloggs buys a property tomorrow for a million quid using a 700,000 quid mortgage he is then deemed to own an asset worth a million quid and his IHT liability should be charged as such - if he dies the very next day his death duties to the HMRC could be charged on a million. I am not sure how that would sit with the great majority of property owners owing tax on something they dont own. Were this to be introduced (if they could get it through which I doubt) there would be a further collapse in property values. Not sure how there would be a general move from property to commercial enterprise unless you  are assuming increased capital with the banks would be fed to small businesses......hmmmm we saw how well that plan worked with QE 1, 2, etc, etc. The banks simply used the funds to increase balance sheet and then leveraged via trading ...... dont think too much was seen by small business. As to hordes of people paying off existing loans ....... I think that many of them would if they had the liquidity but from what I see most average Joes probably dont have enough to replace a burned out washing machine let alone redeem their mortgage.

Hi Mike based on your figures I would agree that by not paying off your mortgage you have in effect "made money". Nevertheless we have a set of circumstances today that will not be the same as 12 months time and certainly not the same in 60 months time. Thus what is right today wont necessarily continue. Every situation needs to be assessed by the individual concerned and whether they wish to "risk" maintaining a mortgage in Spain or not. Personally I am with you ...... its about doing the calculations managing ones money and assessing and trying to interpret forward markets, being decisive and whether the decision turns out in ones favour or not it was the correct decision at that moment in time (and thus not beating oneself up if it goes against).

Hmmm,

to reduce this debate to my level......

if it is a good idea to borrow to buy, then surely it must be a bad idea to pay back in an inflationary environment.......where inflation is above interest rates........no brainer or what????????

paying back of course increases your equity or nett worth, I suppose?

but what use is that if you are not going to use it in some way????????

I know, it makes you feel better and richer.......but of course that will depend on how you use the resources spare.....

but the big worry in the euro case is exchange rates.........if the zone sorts itself out by exiting certain countries such as Spain in this case, then presumably the zone will then be stronger and its currency will strengthen and those paying with £'s will be badly affected.

but if Spain drops the euro and euro mortgages are converted into a new weak currency, perhaps all is well for the borrower......

and if that currency is then weakened further by devaluation then hooray for the borrower.............. and the new flood of UK buyers that will descend on Spain for the weather and the old cheap lifestyle......plus, plus, minus, minus....everlasting debate.

but what if the mortgage is somehow kept in euros..............disaster, or at least misery of everlasting negative equity.

Well Patrick.... put me straight please.

Regards

Norman

I think Norman that whether the Euro farceperiment is dropped or continues to eke out an existence is immaterial for the foreseeable future.

If I had a crystal ball then I could answer your question but unfortunately that is something none of us possesses. Money under the mattress is safe but also redcues in value ..... almost the same as money in a deposit account. If I was looking at real estate for solely investment purpose now I would not be looking in Spain but finding BTL properties in the UK where there is high rental demand. If its lifestyle ..... then the argument for Spain still exists. Real estate here MAY have bottomed out and definitely has in certain areas on the CDS ..... whether thats the same further north I couldnt tell you as there was such a drive up there when CDS prices went up and a huge surplus of brand new empty units which dwarfs the CDS by comparison......McAntony et al have a lot to answer for!

If I was buying in Spain then I would borrow to do so.......even with cash in the bank. These are uncertain times in which we live and I would rather have a situation whereby I could buy my way out of trouble (rainy day money) than my cash tied up in a pied a terre in sunny climes. But none of us is the same and we all have different ideas on what is security. That is just my view and is not biased based on my profession. The new economies are buying in Spain - Russians, Asians, Scandis and even the yanks are starting to come back with money to spend ...... mostly I believe on the CDS ..... starting to see more French money coming in as well. The large majority are using a ratio of 50/50 debt to cash ....... most seem capable of buying outright but take the view they can do more with their liquidity than if they put it all in to a Spanish property.

There are too many "ifs" to give you a straight answer ..... ifs that are beyond the control of us mere mortals.

Isn't the whole point Smiley that people have been encouraged by the Banks and certain professionals to live beyond their means (mortgages used to be based upon a more realistic multiple of your salary), so disincentives to continue doing so need to be taken? I know this sounds crazy to some who wish to play the system and gain the best appreciation from the system (understandable) but there comes a point where taking on a mortage to the value you have suggested in your example presumably means they have the wherewithall to make provision for an IHT bill, and if not, perhaps they shouldn't be allowed to take out the mortgage in the first place! (Very contentious I know!) By allowing unrealistic lending to those who wish to play the system seems to result in over-inflated prices do you not think? I take your point about the Banks, but it's for government to ensure that Banks reallocate monies as was originally intended. It's crazy what has been allowed to happen.

As for average Jo, and not having the wherewithall as you describe, they appear to be in this position due to factors not only out of their control (which include crazy ponsi schemes within the Banking industry and the knock on effects of de-regulation etc on the economy, leading to the crash) but also factors within their control, i.e. making provision for eventualities. No-one minds the risk takers taking their stance if the risk falls down to them, but all too often these risk takers bring others down with them.

Perhaps what we need is to go back to some old fashioned simple thinking where you buy what you can afford with smaller manageable mortgages and save for a rainy day!!! None of this living a false life at the expense of others! It's all about realism at the end of the day!!!!

Anyway it seems that if it is in people's favour right now not to pay off their mortgage then I just hope that they make provision for the time when it could completely do an about turn.

Hmm...........

Perhaps John and his son can confirm........ but the idiots that run our banks seem to have become so market cautious that BTL has become a problem, certainly locally. Despite high rents thanks to "housing benefit" or HLA, they are refusing to lend to landlords with 30 properties in their portfolio and even if they will lend, it is only 50% plus ridiculous rental multiples that the local rents cannot support, also higher than normal interest payments. This seems to be general according to Chamber members, the 30 property limit is deemed risky because of "market exposure" irrespective of equity.

Perhaps they suspect that housing benefit is to be cut or done away with???

According to the big boys you don't mortgage anymore, but joint venture, together with the "mattress money" syndrome brought about by miserly deposit returns and perceived risk, even with government guarantees in place.

Even outside the chamber people are getting together with each other, family etc. to do schemes including conversions etc ...pubs to apartments and the like.

trouble is every plumber is not a good bricklayer and vice versa and every BCO is not intelligent, so it is a bit like do-it-yourself.

However since no one will give me a mortgage to buy silver or gold, my new feeble savings will have to carry on getting 2.3%.

I would like to know whether Spanish banks could retain euro mortgages if the country left the zone?

Regards

Norman

Norman,

                             If I am the John you mentioned, perhaps you could let me know which part of your long post (about paying off a mortgage !) you would like me to confirm,  if I am able.

Ads the reason I used such a high level was because for many of us mere mortals IHT will not be an issue owing to the thresholds in the UK. I haven’t worked in the UK now for 9 years so I could not tell you what income multiples are used there (when I moved to Spain Alliance & Leicester were offering 5.5 times to high earners) but I believe more realistic guidelines have been imposed. In Spain it is a much more practical approach as they work an ability to pay calculation which is based on post tax documented income and also takes into account any other liabilities one may have such as car loans, credit card debt and lease purchase plans (including Child Support arrangements). I have never been an advocate of unrestricted debt but if debt is managed correctly it is a means to an end whether it be for cars, houses or anything else for that matter. In the seven years I practised in the UK in the region of 75% of my business was refinance to relieve unsecured debt problems. Yes that meant adding it to the mortgage BUT I would always operate from the principle of what the client felt they could comfortably afford to pay each month and adjust the mortgage term accordingly. For instance a client struggling to meet monthly payments of £3000 on mortgage and loans and plastic. To consolidate all debt and leave the mortgage term the same would probably mean a new monthly payment of £850 (dictated by term of mortgage of course but most of these were 5 to 7 years into a 25 year mortgage). Then ask them what they felt they could afford (not forgetting they were already finding £3000 a month from somewhere). Invariably that figure would fall between £1500 and £2000. At that point apply that figure to the mortgage and the overall debt is paid off in roughly half the time. Its not rocket science but it’s a powerful persuasion. Only once in a seven year timeframe did I have a client that went back down the path of insanity.

Unfortunately (or maybe fortunately depending on perspective) I am not head of the consumer credit council because without doubt I would impose harsher restrictions (possibly similar to those in Spain) on the ease of acquiring unsecured credit. Card companies raising a limit almost without reference to recourse. Its in their interest (forgive pun) to have people paying 20 to 40% interest for the remainder of their lives. There is dire need for a financial management course to be introduced to the school curriculum!

If by other professionals you mean people like me.......you would have to ask my clients if I have ever encouraged them to borrow more than they thought they needed or wanted - either here or in the UK. I have a fair few testimonials around the EOS site relating to advice I have given here in Spain and as far as I am aware no warnings ....... in my life as a mortgage broker I have only ever had one complaint and that was back in the UK when I left a water mark on a ladys cream coloured carpet from the soles of my shoes one very wet night. The advice she got saved her about 3 grand a month, paid her residential mortgage off in 9 years instead of 21 and gave her the wherewithal to start a successful property portfolio in the Stratford area of London which up to 2009 numbered 48 properties generating a surplus rent in excess of 40,000 a year. She continued to work but chooses to work rather than has to work. She had a unit linked pension at the time that she had been paying £125 a month into for 8 years which had a value of £4,000 at the time. Understandably she was worried that she was flushing money away. Now she has no pension worries and a very secure capital base and her debt ratio is probably about 40%. 2009 was the last time we were in contact so I have to assume no change.

We live in a democracy that our forefathers fought for so that freedom of choice was an option. Unfortunately we now live in a buy now pay later society much of it driven by children and a more modern way of thinking. Whether it is right or not is up to the individual and cannot be dictated by governments (at least I doubt it without revolution).  

 
Thanks for the replies and the pms following my postings about sums.

On thing that I did not point out is the Sterling 'value' of the property.

Assuming the property was purchased for 200,000 Euro's in 2011 (probabally as the result of an 'off plan' deposit in 2005, as in my case).

July 2011 - 200,000 Euro property - Sterling at 1.10 - £182,000

July 2012 - 200,000 Euro property - Sterling at 1.25 - £160,000 a reduction of the Sterling value of the asset of £22,000 in a year. Not including what has probabally a selling price reduction of 20 to 50%. 

So why put money from a UK account with some flexibility into an 'asset' which is decreasing in value - and would be difficult to realise by selling it, almost certainly at significantly less than what you paid for it?

Going back to the 'off plan' bonanza in 2005, many people put money down at an exchange rate of around 1.5.

So that 200,000 Euro property was expected to cost about £135,000.

A 30% Depost of 60,000 Euros went down at 1.5, £40,000.

Purchase in 2011 - another 60,000 Euros  - 30,000E to cover taxes, expenses, and balance on contract - 30,000E.  Total £55,000.

Mortgage £110,000 Euros: £100,000 at  2011 rate, £74,000 at 2005 rate, or £88,000 at 2012 rate.

Expenditure so far £95,000. On that £135,00 property, how much more to spend?

So where will the rate go in 2013, or will Spain come out of the Euro?

MY opinion is that it will continue to go down in value and Spain needs to do a deal to come out of the Euro and be able to adjust it’s exchange rate to other countries, in particular the Pound and other European countries who have invested heavily in Spain or would do so at a realistic rate – which I believe is the equivalent of 1.5 Euro’s to the pound. There will be a period of adjustment which may mean that any reversion to the peseta with cause wild variations – maybe the equivalent of 2 Euro’s to the pound at which point I would pay my mortgage off.

Unfortunately for the get rich quick, property is a long term investment.  

I’ve promised myself that I won’t work out how much money I’ve actually put into my property in Spain.

My advice – Rent and never give up a home in the UK.

Mike.

Norman there is no provision in existing legislation governing whether mortgages will be retained in Euros or whether it would convert to peseta if Spain leaves the Euro ....... I have answered that question before ...... whether they would try to apply retrospective legislation or not is a completely different matter and a question you would need to ask Snr Rajoy

Hi Patrick,

sorry for the dimming memory but I seem to recall that you were contradicted by another poster saying banks can hold mortgages in any currency they choose and do so at the moment.

It would be an incredible favour if they automatically reduced one's mortgage by choosing a reducing value currency.

John did you not post that one of your sons was actively in business in BTL with your assistance at some stage????

Regards

Norman

I dont know whether I was contradicted or not but that would be akin to saying that you could take out a mortgage in sterling in the UK and a bank could arbitrarily convert it to Euros or yen or swiss francs if it chose to. The legislation prescribed that when Spain entered the Euro all peseta mortgages converted arbitrarily to the Euro as that was the currency of the country ..... as I understand it having spoken to a number of knoweldgeable people if the situation is reversed then the procedure will be exactly the same ..... there is no pre-prescribed legislation for exit as nobody expected it to happen. Thus the govt would need to introduce legislation governing the fact that there could be a debt exposure in a different currency to that of the country. While swiss frnac and yen mortgages were being advanced on spanish property (on very small scale) I dont believe the country has the power to impose that on someone with a mortgage in spain as those taking out high risk currency mortgages were doing so from personal choice.