Caution urged over tempting euro loan offer
FARMERS are warned to treat euro loans with caution as long as the UK remains outside European monetary union.
Such loans are likely to be offered at significantly lower interest rates than those based on sterling. Therein lies the temptation, especially if farmers receive all or part of their subsidy payments in euros, with which they could service the debt.
But sterling will fluctuate against the euro as with any other foreign currency, which leaves borrowers open to capital gains and losses, says Barry Saint of the Agricultural Mortgage Corporation.
For example, a farmer taking out a euro loan when exchange rate is £1:1.5 euros would have a loan of £100,000 converted to 150,000 euros.
"If sterling weakened by 15%, which it may well do if the euro is a success, the exchange rate would become £1 to 1.275 euros. The loan in sterling terms would increase to £117,647. Put another way, if the farmer had taken the loan at the new rate, his euro loan would only have been 127,000 euros. There is no guarantee that any interest rate saving would offset this." *