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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%
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 ......
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