Foreign currency mortgages and managed currency mortgages

Single foreign currency mortgages

Given the increasing propensity of companies to spread their operations across Europe, some mortgage holders resident in this country find themselves being paid in Euros and hold Euro denominated bank accounts. It may be convenient to have a mortgage that is also in Euros, as no charge is applied by the bank for converting Euros to pounds Sterling in order to pay their mortgage.

A single foreign currency mortgage provider may allow you to switch currencies to limit the 'currency risk'. However, this foreign currency mortgage option may only be available on an annual basis.

Foreign currency mortgages with a currency switch option

This option allows you to potentially manage the risk of a single currency mortgage loan by maximising the foreign currency exchange effect. Basically, this means that you are able to switch the currency in which the debt is held (and interest charged) into the most advantageous currency, depending on the prevailing foreign currency rates of interest and the direction in which exchange rates are moving.

For example, let's say you originally borrowed in US Dollars, but they are climbing against Sterling rather quickly. This means that the amount you owe is effectively increasing in Sterling terms as the same amount of Sterling buys fewer Dollars. At the same time, the Euro is tumbling against both currencies, a fact which would normally have no effect on your loan. If you have the facility to switch your debt to the weakening foreign currency, Euros, then you are effectively acting to further reduce the balance of your loan as Sterling is able to buy more Euros for each pound you have at your disposal.

If you select a foreign currency mortgage with this currency switch option, you are entering in to a venture that needs time, observation and good judgement. While this system of debt management can be a really effective way of reducing your mortgage, you need to be comfortable with a risk that could end up costing more on a monthly basis if currency mortgage arrangemement goes wrong.

The professionally managed foreign currency switching mortgage may be more appropriate if you don't have the time to monitor exchange rates closely.

Professionally managed foreign currency mortgages

A professional debt management firm will aim to reduce the size of a debt by borrowing in foreign currencies which fall in value against sterling. Also, they will attempt to reduce the cost of servicing the debt by borrowing in currencies which have lower interest rates. By undertaking this sort of operation on your behalf, they will be adding management charges to your costs with no guarantee that they will be successful.

A firm would typically charge a minimum of £2,500 per annum in management charges for a foreign currency switching mortgage service. An additional cost to consider is the 'performance fee'. This is dependent on the size of the debt reduction and interest savings during the course of the agreement. It is usually charged annually and can, in some cases, be added to the loan.

The charges associated with debt management related to a switching currency mortgage may discourage some from taking a closer look at this type of facility. Whilst cost is a factor that requires consideration, it's worth noting the benefit that can be derived from a professionally managed foreign currency mortgage. One management company successfully managed a £1,000,000 Sterling interest only loan advanced in November 1988 into a credit balance of £106,333 by February 2004.

Popular currencies for foreign currency mortgages

Historically, clients have significantly reduced their borrowing costs and, in some cases, sterling equivalent loans by arranging a currency mortgage in Japanese Yen, Swiss Francs, US Dollars, Canadian Dollars, Australian Dollars or Euros.  If you are considering converting to a foreign currency mortgage, why not give us a ring to discuss your options. or click here to send a foreign currency mortgage enquiry.