Foreign Currency Mortgages The Pros And Cons

Foreign Currency Mortgages The Pros And Cons



Foreign Currency Mortgages the​ Pros and​ Cons
Virtually all mortgage borrowers go with a​ mainstream UK lender to​ make the​ biggest purchase of​ their lives,​ it’s the​ done thing and​ to​ be honest most people don’t realise there is​ a​ viable alternative the​ foreign currency mortgage. ​

Interest rates are reasonably healthy in​ the​ UK at ​ the​ moment,​ particularly in​ comparison with the​ 1980s,​ however interest rates are a​ lot higher here than they are in​ the​ Eurozone,​ Switzerland,​ America and​ Japan.
Did you​ know that you​ can borrow the​ capital you​ need for your house purchase in​ Euros,​ US dollars,​ Swiss Francs or​ Yen instead of​ Sterling? This means that you​ could take advantage of​ the​ lower interest rates elsewhere,​ securing the​ loan on​ your house. ​

These 3 month money market interest rates allow you​ to​ compare UK interest rates with other countries
Japanese Yen 0.12%
Switzerland 1.03%
Eurozone 2.46%
US $ 4.48%
Sterling £ 4.64%
Source 3 month Money Market Rates,​ Financial Times,​ 9 Dec 2018
As you​ can see,​ Sterling is​ significantly higher than some of​ the​ others. ​
However,​ you​ will lose out on​ some of​ that advantage because you​ will pay a​ premium to​ borrow currency from another country. ​
Still,​ if ​ interest rates continue as​ they are at ​ the​ moment,​ then there are still large savings to​ be made. ​

You’re probably wondering why,​ if ​ the​ savings are so good,​ only 1% of​ UK householder mortgages are taken out in​ overseas currencies? Unfortunately,​ there are other factors to​ consider.
Interest rates can be unpredictable and​ even though they have been stable for years,​ anything unexpected could happen to​ affect them eg the​ 9/11 attacks. ​
if ​ interest rates in​ the​ country you​ were borrowing from increased,​ then you​ would lose a​ lot of​ the​ advantage between the​ foreign currency mortgage over the​ standard UK mortgage. ​

Exchange rates herein lies the​ most unpredictable area of​ risk. ​
Because you​ borrowed in​ Euros,​ for example,​ the​ loan must be repaid in​ Euros. ​
if ​ the​ Euro/Sterling exchange rates were linked and​ increased and​ decreased at ​ the​ same rate,​ then it​ wouldn’t be a​ problem,​ but of​ course that’s not the​ case.
If Sterling strengthened against the​ Euro,​ then you​ will be quids in. ​
To repay the​ loan,​ you​ wouldn’t need to​ convert as​ much Sterling into Euros,​ and​ you​ would make a​ big saving. ​
That’s the​ scenario that makes the​ foreign currency mortgage so attractive. ​

However,​ if ​ Sterling falls against the​ Euro,​ then you​ will be out of​ pocket,​ having to​ repay effectively more than you​ initially borrowed. ​
It’s a​ huge gamble,​ and​ your home will rest on​ it. ​
Your home will be at ​ the​ mercy of​ the​ exchange rates,​ so you​ could win,​ or​ lose,​ a​ significant amount of​ money.
To get a​ foreign currency mortgage you​ will need a​ deposit of​ at ​ least 20% for your house purchase,​ so you​ will need to​ have a​ good cashflow to​ arrange it.
There is​ an alternative to​ the​ above,​ one that represents less risk. ​
You can link your UK mortgage to​ an interest rate in​ a​ different country. ​
This means that you​ are not gambling on​ the​ exchange rate,​ but you​ will still be subject to​ the​ interest rate,​ in​ the​ hope that they will not at ​ any point exceed the​ UK interest rate. ​
There is​ less risk involved,​ however these kinds of​ mortgages do tie you​ in​ for a​ longer period,​ ie 5 years,​ and​ the​ redemption penalties will be more than nominal. ​
There is​ a​ certain degree of​ flexibility though,​ and​ you​ can often transfer the​ mortgage to​ another property if ​ you​ want to​ pay the​ loan off early.
The above option is​ particularly popular with mortgages linked to​ the​ Swiss Franc interest rate,​ because their interest rates have stayed at ​ beneath 1% for the​ last four years. ​
The Eurozone interest rate is​ also very stable,​ and​ has not moved in​ five years.
Whatever your decision,​ and​ even with a​ UK mortgage,​ it’s a​ gamble and​ deserves a​ lot of​ thought. ​
It’s probably worth talking to​ a​ financial specialist about it. ​
There’s big savings to​ be made,​ but have you​ got the​ stomach for it?




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