Theory Question

shangri la

Purely a theory question:

I have E500,000
I want to buy a house
I have been approved for a 90% LTV (E450,000) on a E500,000 house

Instead of buying the house outright with cash I get the E450k mortgage and deposit my original E450k cash in a German bank.

Ireland leave the Euro and the Punt Nua is subsequently devalued by 50%.

Can I now pay off the total mortgage with E225k from my german bank deposit and have E225k left in the bank?

johnnyskeleton

shangri la wrote: »

Purely a theory question:

I have E500,000
I want to buy a house
I have been approved for a 90% LTV (E450,000) on a E500,000 house

Instead of buying the house outright with cash I get the E450k mortgage and deposit my original E450k cash in a German bank.

Ireland leave the Euro and the Punt Nua is subsequently devalued by 50%.

Can I now pay off the total mortgage with E225k from my german bank deposit and have E225k left in the bank?

I see no reason for the banks to redenominate debt from Euro into the new currency unless it was in their interest to do so. So most likely you would still owe €450k.

Triangla

The bank will want something for that money, the deeds the house you just bought.

shangri la

johnnyskeleton wrote: »

I see no reason for the banks to redenominate debt from Euro into the new currency unless it was in their interest to do so. So most likely you would still owe ?450k.

would an Irish bank not have to have loans to irish citizens denominated in the current irish currency?

shangri la

Triangla wrote: »

The bank will want something for that money, the deeds the house you just bought.

The bank will hold the deeds to the house while there is a mortgage outstanding? Thats fair enough.

Im asking if the mortgage which I assume will be re-denominated in punt nua can be paid off for less euro should the punt nua be devalued after it is adopted.

Marcusm

shangri la wrote: »

The bank will hold the deeds to the house while there is a mortgage outstanding? Thats fair enough.

Im asking if the mortgage which I assume will be re-denominated in punt nua can be paid off for less euro should the punt nua be devalued after it is adopted.

The problem is that no one knows the answer to this question as it as not been provided for. To what extent the assets and liabilities are redenominated would depend on actors which cannot be determined until after the event. That said, you might see your downside risk as the spread between the mortgage interest rate and the post tax deposit rate. As to whether this option price (which is what it is effectively) is worthwhile will depend on your forecast of euro break up and the results thereof.

unknownlegend

The way I look at it is like this:

The bank most likely got their funding from the ECB (or similar), lending in euro at possibly LIBOR/EURIBOR rates. Your debt contract is written in Euro, thus, barring the complete decimation of the Euro, you will have to pay back in Euro.

Where this gets speculative is that if the national currency reverts to a Punt Nua, and the Euro still exists (say in some n-tier system) and rapidly devalues then in real terms your wages reduce while still owing the large Euro denominated debt. I think something similar happened in Iceland during their crash - a lot of the locals had mortgages in Euro, believing it was a matter of time before they joined, while earning Krona... I think this chart says it all http://en.wikipedia.org/wiki/File:EUR_against_ISK_2000-2009.png In other words debt in original currency, while a massively eroded currency means payback is ultimately unlikely.

For this reason if the theoretical question you pose could influence your existential decision making, I'd say be careful.

shangri la

Thanks.

This is just another for banks to restrict credit.

daltonmd

shangri la wrote: »

Purely a theory question:

I have E500,000
I want to buy a house
I have been approved for a 90% LTV (E450,000) on a E500,000 house

Instead of buying the house outright with cash I get the E450k mortgage and deposit my original E450k cash in a German bank.

Ireland leave the Euro and the Punt Nua is subsequently devalued by 50%.

Can I now pay off the total mortgage with E225k from my german bank deposit and have E225k left in the bank?

Or you could owe double!!

http://www.independent.ie/business/personal-finance/surviving-the-recession/what-would-happen-to-your-money-if-ireland-defaulted-2647568.html

"Your mortgage

If you're lucky enough to have a cheap tracker mortgage, some believe you might have to kiss goodbye to it if Ireland leaves the eurozone. "The interest rates on your mortgage would be set to the Irish punt," said Mr O'Doherty. "That means your ECB tracker would disappear."

Your tracker mortgage is a contract which you have with your bank, so whether or not you would lose it if Ireland left the eurozone remains to be seen. However, if the interest rates on mortgages were tied to the Irish punt after an Irish exit of the eurozone, interest rates could soar.

Less than 20 years ago, a currency crisis hit Ireland. The Irish punt was devalued by about 10 per cent at the time and Irish interest rates reached unprecedented levels. Mortgage interest rates in Ireland climbed as high as 16 per cent in 1993.

Those who had taken out a loan from a European bank would also be walloped. An Irish citizen would find it much harder to pay back a mortgage in euro if he is being paid in punts -- as the punt would very rapidly be worth a lot less than the euro."

Tigger

short answer is yes with an if, long answer is no with a but

odds_on

Tigger wrote: »

short answer is yes with an if, long answer is no with a but

Good one, Trig.

shangri la

Tigger wrote: »

short answer is yes with an if, long answer is no with a but

I got a good laugh from that and its probably the best answer at this stage when we just don't know what is going to happen.

D3PO

interesting theory one I thought about aswell but there is just no answer to it right now.

i say get the 450k mortgage and spend your 450k buying 10 year greek soverign debt at a huge yeild.


Ca Ching :pac::pac: