Highlights

• Spanish PM forces banks to balance their books
• Interest rates fall as Italy becomes more stable
• Foreign property buyers in Australia get preferential mortgage deals

Commentary

Since coming to power in December last year the new Spanish Prime Minister Mariano Rajoy has pledged various ongoing efforts to help stablise Spain’s ailing financial industry which has continued to suffer since the property downturn four years ago.  One of the biggest problems facing Spanish banks at the moment is their inadequate cash provisions that can be used to help safeguard their financial position against poor property loans. Last month the Prime Minister and Spanish government took some decisive action to try and tackle this issue by introducing some new rules and regulations that will help ensure sufficient provisions will be in place with all Spanish banks within the next twelve months (with the exception of banks who decide to merge before May this year, who will be given an additional 12 months to build up sufficient reserves). In real terms this will mean that an estimated 50 billion Euro provision will need to be accumulated by the Spanish banks over the next year which in turn should provide them with greater financial security and minimise their need for further government borrowing. Northern Rock and Bradford and Bingley are two real examples here in the UK where poor cash provisions can jeopardize a bank's existence and is a problem that the Spanish government is right to take seriously.

In tandem with these new safeguards the Spanish government also want banks to work towards becoming more transparent with their balance sheets, in an effort to encourage new more competitive rates of borrowing from sources outside of Spain. This money can then be lent out by the Spanish banks through new loans and mortgages which will help stimulate the Spanish economy and its property market. However what we may see in the near term while these banks build up their required cash and asset reserves, is a lack of new lending, or more restricted lending on more disadvantaged terms. During this interim period we believe mortgage services like our own may have a key role to play, by simply being in the loop on which banks really want to do mortgage business, as opposed to those who simply want to promote one. As although on the surface banks may appear to continue to offer a mortgage service, the truth is, behind closed doors they may be looking for a valid reason not to lend and by understanding this at the outset property buyers can save themselves a great deal of time and money.

At the turn of the year we reported that Italy’s cost of borrowing was becoming dangerously close to 7%, a level of interest which many analysts deemed as unsustainable. Today the cost of borrowing has fallen back to below 5% and the general outlook for the Italian economy and property market looks much brighter under Mario Monti’s reign as Prime Minister. In reaction to this more stable and positive environment we saw some banks drop their interest rates last month, with the cheapest mortgage deal for foreign property buyers in Italy now weighing in with an interest rate of just 3.75%. Currently holiday home buyers only need a 20% deposit to get an Italian mortgage, with lending available from 100,000 Euros over terms up to 25 years.

Australian dollar mortgages are currently proving so expensive that foreign property buyers can pay less than a third of the mortgage costs being charged to Australian residents, simply by choosing to repay their mortgage in a different currency (an option which is not currently available to Australian residents). A typical interest rate of an Australian Dollar mortgage is currently around 7%, whereas foreign property buyers who choose to repay their mortgage in a different currency can expect to pay an interest rate of 2.09% for a Pound Sterling mortgage, 3.38% for a United States dollar mortgage and 3.9% for a Euro mortgage. Another interesting fact about these foreign currency mortgages is that they are available for both property purchases and remortgages, which means there is a great opportunity for foreign property owners in Australia who currently have Australian dollar mortgage to switch to a new currency mortgage and pay a much more competitive rate of interest.

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