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Cheap mortgages in Europe: don’t rent, buy!

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“Now it is cheaper to buy property in Europe than to rent it,” believes George Kachmazov, the founder and CEO of international real estate broker Tranio. “Mortgage costs in European cities are lower than rent payments”, he explains.

Now it is cheaper to buy property than to rent it. Mortgage repayments in European cities are currently hitting below the cost of monthly rent.

The EU has its eyes set on one target: stimulating economic growth; and for consumers that means incredible interest rates, especially in the UK, Germany, Italy, Monaco, Switzerland and other states. They have hit unparalleled lows more than once in 2014–2015 and the European Central Bank has even dropped its benchmark rate to a record 0.05% in an attempt to encourage people to buy. Since then, mortgages have become very popular among foreign buyers who could get and pay off their loan from abroad at the current market rates as well as investors looking into the European property market.

George Kachmazov, the founder and CEO of international real estate broker Tranio

By April 2015, interest rates in France fell to 1.80% for a 10-year maturity term and 2.40% for 20 years, while 15-year mortgages fell from 3.00% to 2.15% in one year. Reduced mortgage rates are favourable to buyers. For example, for monthly repayments of €1,000 at 4.5% on a 20-year mortgage, a bank might lend €145,000. With the interest now only half that, a buyer could get a €190,000 on the same terms, gaining them an extra €45,000.

Mortgage and loan restructuring in Europe are potentially viable options for people looking to buy holiday homes, permanent residences and investment property. With the current rates, they allow you to get more funds and pay less interest on your invested amount. Just recently, a Tranio client got a 15-year mortgage of 60% property value at 1.75% interest per annum for a flat in Germany. Not to mention that European residents can get even better mortgage terms.

However, while the current set-up encourages buying, there is also a marked increase in profiteering practices. Property prices in London have been going up 10% every year for the last five years, prompting unsophisticated schemes to earn a profit off the growth. Buyers are putting down 20% of their own funds, with a loan at 2% and a 5-year deferral of principal repayment, then living in or letting the property for 3-5 years before reselling it at a profit. With forecasts saying downtown London real estate will grow 23% by 2019, savvy investors are buying to let.

The possible market risks will crystallise when the European Central Bank starts to increase rates, fuelling proportional mortgage costs for future borrowers. It is likely that many owners will have to sell their property.

The mere fact that money today is of low value in Europe is curious, especially since the earning power of bank deposits is close to zero or even negative. Europeans are looking for options to retain and boost the face value of their capital, engrossing property and heating the market. All this speeds up price growth and injects new investments into real estate.

It all smells a bit fishy. A bubble seems to be growing, that is why we advise our clients intending to invest in overseas real estate not to chase high rental yields. High yields come with high risks, so instead we recommend focusing on the most liquid assets that will always be in demand among tenants and easily resold in any market. Indeed, low-risk real estate brings in lower rent, with prices increasing steadily over the long term and a proper benefit ratio (by the capitalisation growth and rental flow) as well as mitigated risks.

George Kachmazov, Tranio Managing Partner

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    Tranio’s managers offer advice on buying real estate overseas
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