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THOUSANDS of British people with second homes abroad are the latest to face a payment shock following the global credit crunch, as lenders across Europe raise their rates and tighten up their criteria.

British borrowers with euro mortgages, which have been popular in recent years because they have tended to be cheaper than sterling loans, could see their repayments jump by about £50 a month, or £600 a year - even though the European Central Bank (ECB) kept its main interest rate on hold last week.

This is because many variable euro mortgages are linked to rates in the wholesale markets, where banks lend to each other. These have gone up as America’s sub-prime mortgage melt-down has spread globally.

Meanwhile, lenders in American and Spain have been scaling back lending, particularly in problem areas such as Florida and the costas where property prices have been falling.

Miranda John at Savills Private Finance International, a broker, said: “British borrowers on fixed euro deals will not be affected, but some of those with variable rates will face higher repayments. This may come as a surprise given that the ECB left interest rates unchanged last week.” Most variable euro deals are linked to Euribor - the rate at which banks lend to each other in the eurozone. Short-term Euribor rates have risen in recent weeks as banks have become nervous about lending to each other in the wake of the credit crunch, as they have in America and Britain.

The three-month rate hit a six-year high of 4.79% last week - 0.79 points higher than the ECB’s main rate of 4%.

However, not all foreign home-owners with variable rate deals are in for a payment shock. In Spain, most loans are linked to 12-month Euribor, so rates are reset once a year - only those whose deals are due for renewal imminently will see their payments go up.

In France, many deals are linked to the three-month rate. Some lenders reset the rates annually, but others, such as UCB and Crédit Immobilier de France, change their rates every quarter.

Someone with a €200,000, (£138,624.26) 25-year repayment mortgage that is 1.2 points above three-month Euribor, would see payments jump by £54 a month from £866 to £920. This assumes their rate was reset on October 1, when Euribor was 4.79% - 0.62 points higher than it was three months earlier. It also assumes an exchange rate of €1.40 to the pound.

As well as raising rates, lenders in the US and Spain have been tightening their criteria.

As in the UK, many American lenders allowed borrowers to self-certify their income - in other words, borrowers did not have to prove their earnings. However, lenders have been stung by thousands of low-in-come customers defaulting on their loans as rates have gone up, and have subsequently clamped down on lax lending.

Kevin Fleury at Smartmoney-overseas, another broker, said: “Lenders now require much more documentation and some are pulling out of certain parts of the market.”

Bank United, for example, has stopped lending on short-term rental properties in Orlando, Florida, while many lenders are nervous of condo-hotels. These are like European apartment-ho-tels, where people buy a flat in a building with a hotel-reception.

In Spain, many homebuyers will find they cannot get such big mortgages as prices in some areas, notably Marbella and parts of the costas, have fallen.

In the past, some banks based their lending decisions on the valuation price, which could be higher than the price paid for the property because developers offered big discounts.

Suppose someone bought a property valued at €625,000, but got a discount so they only paid €500,000. The bank might still lend, say, 80% of the €625,000 valuation price, or €500,000.

Banks were prepared to turn a blind eye when prices were rising fast, but as values have come down they face lending on homes in negative equity.

As a result, most lenders will now advance only on the lowest price, whether that be the declared price or the valuation price. This means many second homebuyers will not be able to get such a big mortgage. Using the above example, the borrower would only be able to get €400,000 - 80% of €500,000.

Norwich & Peterborough building society, which offers mortgages in Spain, has recently changed its criteria. It used to lend up to 75% of the valuation price. However, it will now lend up to 75% of the valuation price or 90% of the declared price, whichever is lower.

The other main British lenders which offer loans in Spain - Barclays, Halifax and Santander, which owns Abbey - said they have always only lent on the declared price.

John said: “There are some good opportunities for people looking to buy in Spain. Distressed sellers who need to sell quickly may be happy to accept less than the market price, but don’t assume you will be able to borrow 100%.”

Story from timesonline.co.uk