Financial News

[andrewducker]

The EU want to make it much easier to take out mortgages across borders - so, for instance, I could take out a mortgage with a bank in France. As the EU interest rate is a couple of points below the UK one I suspect many people would instantly switch their mortgages over to euros rather than pounds. Which would put us straight back into a hugely rising property market and effectively take control of interest rates out of the Bank of England's hands. It would thereby effectively remove the major reason or not joining the Euro - i.e. control over our own currency.

Interesting manouver. I wonder if they'll get away with it.

Comments

[drplokta]

Mortgages in European currencies at European interest rates have been available for years, but they're a really bad idea for most people, because they expose you to massive currency risk. For example, on 1 January 2002, a pound would buy you about EUR1.60. Two years later, it was EUR1.4 -- so if you had a Euro mortgage taken out in 2002, by 2004 you'd owe over nearly 15% more in sterling than when you took out the mortgage.

In fact, the difference in interest rates reflects exactly the market's perception of future exchange rate movements. If the Euro interest rate is 3% and the sterling interest rate is 5%, that means that the market expects the Euro to appreciate by 2% against the pound over the next year. So if the markets get it right, you end up paying exactly the same with a Euro mortgage as with a sterling one, but you expose yourself to massively greater risk and volatility.

The only people for whom a Euro mortgage makes sense are the vanishingly small proportion who are paid in Euro, and so suffer foreign exchange risks if they have a sterling mortgage.

Finally, one should observe that the primary purpose of interest rate changes is not to change the level of mortgage repayments, and in the extemely unlikely event that there was a massive move to Euro mortgages this would not affect the Bank of England's ability to control interest rates, any more than would a (rather more likely) move to long-term fixed rate mortgages. The primary effect of interest rates on the economy is the change in the cost of short-term money to businesses, who have more sense than to borrow Euro instead of sterling just because the nominal interest rate is a couple of percent lower.

[andrewducker]

I don't understand your second paragraph there - interest rates aren't set by the markets - they're set by the central banks.

And the primary purpouse of interest rates isn't mortgage repayments, but they certainly take them into account, and an awful lot of government spin has gone into talking about interest rates and their effect on house prices and it most definitely seems to be taken into account during their deliberations.

[drplokta]

Interest rates aren't set by markets, but exchange rates are. I probably should have said that if UK interest rates are 5% and euro rates are 3%, the pound will go to a level against the euro such that it can be expected to depreciate by 2% over a year.