Foreign Currency Mortgages What Are They And What Are The Risks

Foreign Currency Mortgages What Are They And What Are The Risks



Foreign Currency Mortgages – What Are They And What Are the​ Risks?
99.9% of​ mortgage borrowers raise the​ money they need to​ buy their home in​ pounds sterling and pay the​ prevailing UK based interest rate .​
But it​ does not have to​ be that way……. .​
Whilst by its' own historical standards,​ the​ UK's domestic interest rates are low,​ they are still significantly higher than in​ the​ Eurozone,​ America,​ Switzerland and indeed,​ Japan .​
Therefore,​ you​ can currently borrow the​ money you​ need in​ Euros,​ $ dollars,​ Swiss Francs or​ Yen,​ secure the​ debt against your house in​ the​ UK and pay a​ much lower rate of​ interest .​
The following 3 month money market interest rates illustrate the​ extent to​ which UK interest rates are ahead of​ other parts of​ the​ world:
Sterling £ 4.64%
US $ 4.48%
Eurozone 2.46%
Switzerland 1.03%
Japanese Yen 0.12%
(Source: 3 month Money Market Rates,​ Financial Times,​ 9/12/05)
But don't expect to​ borrow money for your mortgage at​ these 3 month Money market rates .​
You will have to​ pay a​ premium for borrowing in​ an​ overseas currency .​
Nevertheless,​ if​ interest rates remained as​ they are now,​ there will still be significant interest rate savings to​ be made .​
So why are less than 1% of​ UK domestic mortgages taken out in​ overseas currencies? the​ answer: there are extra risks .​
Interest rates could buck historical trends and narrow the​ gap between sterling based rates and the​ rates for the​ currency in​ which the​ mortgage has been borrowed .​
This would reduce the​ interest rate saving and indeed,​ at​ some stage,​ could make the​ interest rate more expensive than for a​ standard £sterling mortgage .​
But by far the​ biggest risk lies' in​ changes in​ exchange rates .​
If you​ have borrowed in​ say,​ Yen,​ you​ eventually have to​ repay the​ loan in​ Yen .​
That would be fine if​ the​ Yen/Sterling exchange rates were frozen together – but they aren't .​
If sterling strengthened against the​ Yen,​ then you​ would have to​ convert less sterling back into yen to​ repay the​ loan than the​ sterling value of​ the​ money you​ initially borrowed .​
That would be great,​ an​ interest rate saving and pay back less than you​ borrowed .​
But if​ sterling fell against the​ Yen the​ reverse happens – you​ end up paying back more capital than you​ borrowed .​
So in​ this context,​ an​ overseas mortgage becomes a​ currency bet that sterling will not fall against the​ currency you​ borrowed .​
In other words you​ have converted your mortgage and what is​ probably your biggest personal liability,​ into a​ currency speculation .​
And secured your home against it! you​ could win but it's not for the​ faint at​ heart!
Another point to​ be aware of​ is​ that you'll need a​ deposit of​ at​ least 20% for your house purchase in​ order to​ qualify for a​ foreign currency mortgage .​
Incidentally,​ there is​ now a​ second option .​
You can take out a​ mortgage in​ £sterling and have the​ interest rate you​ pay linked to​ a​ foreign interest rate .​
Whilst you​ avoid the​ currency exposure risk,​ you​ are still taking gamble that the​ overseas interest rate plus the​ interest rate premium you'll have to​ pay,​ will remain lower than the​ UK's domestic interest rates .​
These types of​ mortgage typically have a​ 5 year tie in​ clause .​
Therefore,​ you'll have a​ hefty penalty to​ pay if​ you​ want to​ pay it​ off early,​ although the​ mortgage can usually be moved to​ another property .​
For some that represents an​ acceptable risk,​ especially if​ the​ mortgage is​ linked to​ the​ Swiss Franc interest rate which has been astonishingly low and stable over past years .​
For example,​ the​ interest rates in​ Switzerland have not moved above 1% in​ the​ last 4 years and the​ Eurozone interest rate has not changed in​ 5 years .​
Nevertheless,​ part of​ the​ wording for a​ regulated investment warning comes to​ mind …. .​
past performance should not be construed as​ a​ guarantee of​ future performance ……
You pays your money and you​ takes your chance.




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