herald

Saturday 25 October 2014

Paying through the nose for a foreign mortgage

Dan White gives his advice to some of your questions

We purchased a property in Spain last year. We took out a mortgage of approximately €80k through Cajamurcia Bank. At the time we thought we were going on to a variable rate. However, after contacting the bank, they informed us that we are on Euribor rate which they said is standard with their bank.

Can you clarify what Euribor is, as we are paying an interest rate of approximately 6pc. We have been told by the bank that this can change again.

Would it be worth our while re-mortgaging in Ireland and paying off this bank in Spain as we are unsure of this Euribor rate and how far it can increase?

Liam

Euribor (euro interbank offered rate) is the interest rate at which banks lend euro to one another on the interbank market.

Before the credit crunch struck in August 2007, the Euribor rate was only marginally higher than the ECB's short-term interest rate.

However, after August 2007 a wide gap opened up between Euribor and ECB rates. This meant that people who had taken out loans linked to Euribor found themselves facing steep interest rate increases, even though the ECB had left its interest rates unchanged.

For anyone such as Liam, whose interest rate was linked to Euribor, this meant that their interest rate rose also.

In recent months, the gap between Euribor and ECB interest rates has narrowed again.

By the end of last week the three-month Euribor was down to just 2.039pc, only marginally higher than the ECB's official 2pc interest rate, while the 12-month Euribor was at 2.223pc.

As the ECB cut rates in early January, it's probably reasonable to assume that this has yet to be reflected in the interest rate that Liam is paying his Spanish bank. However, at the end of 2008 the three-month Euribor stood at 2.892pc while the 12-month Euribor was at 3.049pc.



SHYLOCK

In other words, on even the most charitable interpretation, Liam seems to be paying a margin of at least 3pc over Euribor on his mortgage to the Spanish bank. That's a Shylock rate.

So what should Liam do? If he can, he should try to re-mortgage the Spanish property with an Irish bank.

Unfortunately that's almost certainly a long shot in the current climate.

Despite their protestations to the contrary, most of the Irish banks have, in effect, stopped lending. Meanwhile the Spanish property market is also in the doldrums making it difficult, if not impossible, to sell the property.

All of which means that Liam may have no choice but to grin and bear it.

I have a number of prize bonds at present, how safe are they now?

Mary

Prize bonds are one of the safest forms of investment.

They are Government bonds where the money which would otherwise be used to pay interest to the bondholders, currently the equivalent of a 3pc interest rate, goes instead to a prize fund from which prizes are paid to the owners of the bonds whose numbers are drawn in the monthly draw.

At the end of 2007 there were more than €630m of prize bonds outstanding -- an increase from €590m the previous year. As Government bonds, prize bonds are explicitly guaranteed by the State.

Unlike the Government guarantee for bank deposits, which expires in September 2010, the State guarantee of prize bonds covers any amount of bonds purchased and is not time-limited in any way.

Unless the Government goes bust you can't get any safer than that.

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