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    • Foreign Currency Mortgages What Are They And What Are

      Date: 2010.02.28 | Category: Mortgage | Response: 0

      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, pounds, 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, 91205)

      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 YenSterling 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.

    • Foreign Currency Mortgages The Pros And Cons

      Date: 2010.02.21 | Category: Mortgage | Response: 0

      Virtually all mortgage borrowers go with a mainstream UK lender to make the biggest purchase of their lives, its the done thing and to be honest most people dont 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 pounds, 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 Yen0.12%
      Switzerland 1.03%
      Eurozone 2.46%
      US 4.48%
      Sterling 4.64%

      (Source: 3 month Money Market Rates, Financial Times, 9 Dec 2005)

      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.

      Youre 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 911 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 EuroSterling exchange rates were linked and increased and decreased at the same rate, then it wouldnt be a problem, but of course thats not the case.

      If Sterling strengthened against the Euro, then you will be quids in. To repay the loan, you wouldnt need to convert as much Sterling into Euros, and you would make a big saving. Thats 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. Its 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, its a gamble and deserves a lot of thought. Its probably worth talking to a financial specialist about it. Theres big savings to be made, but have you got the stomach for it?