Currency Mortgages - the Rewards and Risks

The Rewards of Foreign Currency Mortgages

One advantage of a foreign currency mortgage may be obvious - the opportunity to borrow money at a low rate of interest. This can be achieved by choosing a currency that has a lower lending rate of interest than UK Sterling.

Example
In the UK a £250,000 Interest Only mortgage at 6.75 percent would equate to monthly interest repayments of £1,406.25. If you borrowed the same mortgage in Japanese Yen, for instance, at a rate of 2.05 percent, then your interest repayments would reduce to £427.08 saving £979.17 a month.

More importantly, if the currency markets work in your favour, then there is scope for further savings to arise. If the pound climbs in value against the currency in which you took the foreign currency loan, you will need to spend fewer pounds to buy the same amount of foreign currency you initially borrowed. This means that in real terms, your mortgage debt has effectively decreased and your monthly repayments will be lower in pounds Sterling. Alternatively, if there is provision to do so in the terms of the mortgage, it may be possible to maintain the level of the monthly repayment and reduce the mortgage debt early with a lower total interest bill.

Currency Mortgage Example
In October 2002, £0.64518 Sterling purchased $1 US Dollar.

At this time a mortgage of £250,000 Sterling would have equated to
$387 488 US Dollars. In July 2004 the exchange rate had moved to 0.55308 which meant that if the US Dollar mortgage had been switched to UK Sterling, the debt would have reduced from £250,000 to £214,312 saving £35,688 before any related charges.

The Risks of Foreign Currency Mortgages

Foreign currency mortgages are for risk-aware speculators.
As previously mentioned, foreign exchange markets can be volatile. Just as the value of Sterling can go up against the foreign currency of your choice, it can also go down. If the worst happens and Sterling deteriorates against the currency in which your mortgage has been taken or the mortgage loan currency strengthens, you will find your monthly repayments and the Sterling equivalent debt rising. This is regarded as the 'currency risk'.

Foreign Currency Mortgage Example
If Sterling fell by 10 percent on a £150,000 loan borrowed in Euros at an interest rate of 5.5 percent, for instance, you could end up paying as much as £100 extra each month, due to the fact that the Sterling equivalent value of your loan has risen by ten percent.

Currency Mortgage Currency Switching
Our lenders will allow you to switch from one currency to another to limit the 'currency risk' on the borrowing. See Currency mortgages with a currency switch option for more information.

You can borrow up to 65 percent of the property value with a foreign currency mortgage. This protects the lender against sizeable currency swings and ensures that the possession value of the property in sterling will almost certainly be sufficient to repay the currency mortgage debt. To minimise the risk further, some lenders reserve the right to revert the currency mortgage back to UK Sterling, particularly if the equivalent UK Sterling debt increases by as much as fifteen percent.

Balancing the Risks and Rewards of a Foreign Currency Mortgage

To summarise, there is scope to enjoy success on the foreign exchange and benefit from lower monthly repayments as a result of a reduced interest rate. However, only consider taking out a foreign currency mortgage if you are able and prepared to tolerate increases in your monthly repayment and capital debt.