Articles about Mortgage Loans---Foreign Currency Mortgages - the advantages and disadvantages

Menu

Home

To View a list of all articles about mortgages click here

Foreign Currency Mortgages - the advantages and disadvantages

The vast majority of mortgage borrowers get their mortgage from a mainstream UK lender, paying in pounds sterling and following the Bank of England base interest rate. But there are alternatives...

The UK's domestic interest rates are quite low, especially in comparison with recent years, however interest rates are in fact a lot lower in the Eurozone, Switzerland, America and Japan. You have the option of borrowing the money you need for your house purchase in Euros, US dollars, Swiss Francs or Yen, securing the debt on your house and taking advantage of the lower interest rates.

This illustration of 3 month money market interest rates demonstrate the differences between UK interest rates and those around the world:

Japanese Yen 0.12% Switzerland 1.03% Eurozone 2.46% US $ 4.48% Sterling £ 4.64%

(Source: 3 month Money Market Rates, Financial Times, 9/12/05)

You won't get as good a deal as the money market rates illustrated suggest, because you will have to pay a premium for borrowing in an overseas currency - however, if interest rates stay as they are now, the potential is still there to make huge interest rate savings.

So if the rates are so good, why are only 1% of UK householder mortgages taken out in overseas currencies? The reason is: there are extra risks.

Interest rates - they could go against historical trends and increase, narrowing the gap between UK rates and the rates for the overseas currency in which the mortgage was taken out. This would mean a reduced saving in interest and it could even turn your saving into a deficit, and cost even more than a standard UK mortgage.

Exchange rates - the biggest risk lies here. If you have borrowed in Swiss Francs for example, you have to repay the loan in Swiss Francs. If the Swiss Franc/Sterling exchange rates could be frozen together then it wouldn't be a problem, but of course that's never going to happen.

If Sterling strengthened against the Swiss Franc, then your risk has paid off. You would have to convert less Sterling back into Swiss Francs to repay the loan than the Sterling value of the capital you borrowed in the first place. An interest rate saving and pay back less than you borrowed, that's the ideal scenario.

But if Sterling falls against the Swiss Franc you get the worst-case scenario, and you will end up repaying more money than you borrowed. So in this context, you'll be taking out an overseas mortgage rests on the hope that Sterling will not fall against the currency you borrowed. Essentially, you will have converted your mortgage into a currency speculation, securing your most expensive possession, your home, against it! There's big savings to be made - but it's a big gamble.

You will also need to provide a lot of cash up front, to get a foreign currency mortgage you will need a deposit of at least 20% for your house purchase.

There is another way. You can link your pounds sterling mortgage to a foreign interest rate. You'll avoid the exchange rate gamble, but you will still be gambling on the assumption that overseas interest rates will stay at a lower rate than the UK's domestic interest rates. These types of mortgage typically tie you in for 5 years, and if you want to pay it off early or switch mortgages, you will have to pay a large penalty. However, the mortgage can often be transferred to another property. Some people find this type of mortgage represents an acceptable risk, especially if the mortgage is linked to the Swiss Franc interest rate. Interest rates in Switzerland have remained below 1% for the last four years. Similarly, the Eurozone interest rate has not moved in five years.

Whatever you decide, it's always a gamble, and you must think long and hard before making a decision, ideally seeking independent financial advice. In the long run, it's you who will either be the winner, or the loser.

About the author:

Michael writes for Brokers Online ( http://www.life-assurance-bureau.co.uk ) who offer life insurance and mortgages( http://www.life-assurance-bureau.co.uk/mortgages/ ).

Written by: Michael Challiner

Related News:

Other Articles of Interest

Adjustable Rate Mortgages and Negative Amortization For many borrowers, adjustable rate mortgages are an attractive means of qualifying for a home. Fewer borrowers realize the potential negative amortization problems these loans can create. Adjustable Rate Mortgages Adjustable rate... ...read more

Getting Pre-Approved For A Mortgage Makes Buying Easy Whether buying or selling a home, the real estate transaction process can be seriously stressful. Hey, no pain, no gain. Getting pre-approved for a mortgage can seriously reduce stress levels. Lender Approval Many people make the mistake of... ...read more

Interest Only Home Mortgage Loans - Good Or Bad Idea? Is an interest only home mortgage loan a good or bad idea for financing a home? These loans have become very popular and are one of the many different kinds of financing available for property. Opinions vary as to whether an interest only... ...read more

Mortgage Marketing: 3 Power Tools that Secure Leads from Realtors Some real estate agents will never be loyal to one loan officer, instead they give their potential homebuyers three business cards of lenders for them to select from. What do you do if you're not getting a ringing endorsement from the agent? How... ...read more

Subprime Hybrid Mortgages Subprime hybrid mortgages offer temporarily low rates for borrowers while they work to rebuild their credit. With a sub-prime hybrid mortgage, you don't have to pay PMI, saving hundreds a year. After two or three years of on time payments, you... ...read more