Euro adoption - Pros and cons of € or Lm mortgage financing
At this stage of the euro changeover process, Maltese commercial banks are offering a number of interesting mortgage financing products both in Maltese lira and in euro. There are a number of pros and cons associated with each product that one should...
At this stage of the euro changeover process, Maltese commercial banks are offering a number of interesting mortgage financing products both in Maltese lira and in euro. There are a number of pros and cons associated with each product that one should consider prior to opting for the Maltese lira or the euro financing solution:
Interest rates: At present, euro interest rates on mortgages are cheaper than on Maltese lira financing solutions. This is because the Maltese lira attracts a higher premium of between 25 to 50 basis points. At the end of December, Maltese interest rates are expected to converge with those of the euro area. Within the current scenario, both Maltese lira and euro the interest rates are expected to converge at between 4.25 per cent and 4.50 per cent. This is subject to change due to new economic and monetary policy developments.
Within the present interest hike scenario, it would be attractive to lock into a fixed rate for a short term period or simply opt for the variable rate. Once this interest rate hike cycle is over, one should consider locking into a longer term position when the cost of funding becomes cheaper. The euro area is currently passing through a healthy economic cycle and the European Central Bank has been raising interest rates to keep the inflation rate at bay within and close to and around the two per cent inflation target.
Time frames: Where one opts for a fixed or variable mortgage, one needs to look at the time factor and the interest rate regime prevailing at that point in time. The interest rate fluctuations over a five-year period should be much less than those over say a 30-year period. In general, due to the timing effect of monetary policy, interest rate changes in the economy (that is technically known as the transmission mechanism), would last for two to three years;
Foreign exchange charges: If one already receives his income flows in euro, it would be clearly logical to go for euro-related financing. In fact, from now till the end of the year, the euro will still be a foreign currency and will attract a foreign exchange charge by the commercial banks.
If a mortgage is being approved in a particular currency, it is important that the buyer and seller agree on the currency terms to limit currency risk. If one's income stream is in US dollars one needs to be fully aware of the strength of the euro against the US dollar. Within such a scenario, it is important to hedge one's position to minimise currency fluctuations.
When deciding on financing issues, it is highly recommended that one seeks advice from authorised financial institutions.
• Mr Cassar Torreggiani is the executive head responsible for the euro changeover programme at Bank of Valletta.
Interest rates: At present, euro interest rates on mortgages are cheaper than on Maltese lira financing solutions. This is because the Maltese lira attracts a higher premium of between 25 to 50 basis points. At the end of December, Maltese interest rates are expected to converge with those of the euro area. Within the current scenario, both Maltese lira and euro the interest rates are expected to converge at between 4.25 per cent and 4.50 per cent. This is subject to change due to new economic and monetary policy developments.
Within the present interest hike scenario, it would be attractive to lock into a fixed rate for a short term period or simply opt for the variable rate. Once this interest rate hike cycle is over, one should consider locking into a longer term position when the cost of funding becomes cheaper. The euro area is currently passing through a healthy economic cycle and the European Central Bank has been raising interest rates to keep the inflation rate at bay within and close to and around the two per cent inflation target.
Time frames: Where one opts for a fixed or variable mortgage, one needs to look at the time factor and the interest rate regime prevailing at that point in time. The interest rate fluctuations over a five-year period should be much less than those over say a 30-year period. In general, due to the timing effect of monetary policy, interest rate changes in the economy (that is technically known as the transmission mechanism), would last for two to three years;
Foreign exchange charges: If one already receives his income flows in euro, it would be clearly logical to go for euro-related financing. In fact, from now till the end of the year, the euro will still be a foreign currency and will attract a foreign exchange charge by the commercial banks.
If a mortgage is being approved in a particular currency, it is important that the buyer and seller agree on the currency terms to limit currency risk. If one's income stream is in US dollars one needs to be fully aware of the strength of the euro against the US dollar. Within such a scenario, it is important to hedge one's position to minimise currency fluctuations.
When deciding on financing issues, it is highly recommended that one seeks advice from authorised financial institutions.
• Mr Cassar Torreggiani is the executive head responsible for the euro changeover programme at Bank of Valletta.