What the euro crisis will mean for holiday homes

Carl Astorri, head of economics and asset strategy at Coutts, the private bank, said: “The scale of devaluation that Greece needs [to boost its economy] can only come from exiting the euro.”

David Fletcher, 45, from Beaconsfield, Buckinghamshire, bought a three-bedroom villa in Kefalonia, an island south of Corfu, in 2006. He said: “I’m extremely concerned about what would happen if Greece eventually leaves the euro.”

Holiday homeowners would be instantly plunged into negative equity if that happened, experts have said, because their euro debt would be worth more than the value of their asset in drachma.

We answer readers’ questions:

Now the crisis has been averted short term, what will happen to the euro?
The Greek vote led to a rally in the euro, which strengthened from €1.12 against the pound at the start of the week to €1.10, where it remained on Friday.

Borrowers with euro mortgages have been warned to expect the currency to strengthen still further against the pound in the short term, despite fears over a possible default by Greece. Next Thursday, the European Central Bank is expected to raise the interest rate a quarter point to 1.5%, boosting the attractiveness of the euro compared with the pound or the US dollar.

Adam Jordan of Moneycorp, the foreign exchange firm, said: “Even if there is a Greek default in September, the pound may not benefit because Mervyn King [the Bank of England governor] has said that the biggest risk to the UK economy is a European debt crisis.

“Over the next six months, I think the euro will outperform the pound, potentially strengthening up to €1.08.”

He said borrowers who cannot afford to gamble on the movement of the euro should consider locking into a forward contract for the next six months to protect themselves against a rise in repayments if the euro strengthens further. “If you are someone who likes to fix their mortgage rate because you are concerned about the unknown, it makes sense for you to secure the exchange rate as well,” said Jordan.

In the longer term, higher interest rates and a stronger economy in the UK should lead to a weaker euro against the pound, according to brokers.

Jordan said: “The situation should improve in the UK over the next three, four or five years. If our recovery remains on track, we could see the euro fall back to €1.30 or €1.40, but that is a long way off.”

What if my mortgage isn’t in euros?
Thousands of Britons who bought property in Cyprus in 2007 and 2008 were advised to use Swiss franc mortgages because the interest rates were low. Their repayments have subsequently soared as the currency has strengthened from about SF2.15 to the pound in 2008 to about SF1.55, according to HiFX, the currency broker. Meanwhile, property prices on the island have fallen dramatically in the recession.

Brokers expect the Swiss franc to continue to strengthen, reaching SF1.30 to the pound in coming months. “Borrowers who do not want to risk further rises in their repayments should lock in to the current exchange rate for 12 months or longer,” said James Hickman of Caxton FX, another currency broker.

What will happen to my mortgage if Greece defaults farther down the line?
Tracker mortgages in the eurozone are pegged to three-or six-month Euribor rates, the moneymarket rates that dictate the cost banks pay for borrowing from each other.

If Greece defaulted on loan repayments, it is likely that these Euribor rates would climb suddenly.

Since the start of the year, three-month Euribor has already risen from 1% to 1.53%, adding €50 to the cost of a €200,000 mortgage pegged at 2% above three-month euribor.

Annik Lambert, secretary-general of the European Mortgage Federation, which represents lenders across the European Union, said: “If Greece were to default, it would lead to a further increase in Euribor rate and mortgage rates would rise even more steeply.”

However, those with loans from French banks would not suffer from a rise in repayments. Simon Smallwood of International Private Finance said: “The majority of French banks increase the term of the mortgage if interest rates rise rather than monthly repayments.”

Other French banks, including BPI, provide a guarantee that a mortgage term can be increased only for five years.

Borrowers on variable deals who are worried about rising interest rates could consider fixing. In France, most banks allow borrowers to switch to a fix without cost, although this is not available in Spain or Portugal.

The best-buy fixed-rate deal in France is 4.55%, while in Spain it is 5.95% and in Portugal, 6.05%.

I bought my Greek holiday home with a euro mortgage from a Greek bank. I know it’s unlikely, but what would happen in the worst case scenario that Greece leaves the euro?
Many of those who have bought a second home in the Greek islands over the past decade used a euro mortgage from a Greek bank.

The British Bankers’ Association and the European Mortgage Federation, the trade bodies, have told The Sunday Times that in the event of Greece leaving the euro and adopting its own currency, likely to be the new drachma, mortgages held by foreign borrowers would probably remain in euros.

However, while the debts would remain in euros, the property would be valued in the new currency, which would collapse in value.

May at Capital Economics said: “If Greece were to default and abandon the eurozone, it would almost certainly result in a domestic financial crisis plunging the economy even deeper into recession.

“This is likely to prompt investors to sell Greek assets causing the new currency to plunge in value. The new drachma would depreciate sharply, meaning that the euro value of property owned by foreigners would plunge.”