Title:
Foreign Currency
Mortgages – The Pros And Cons
Word Count:
683
Summary:
Virtually all
mortgage borrowers go with a mainstream UK lender to make the biggest purchase
of their lives, it’s the done thing and to be honest most people don’t 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 ca...
Keywords:
foreign,mortgages,risk,gamble
Article Body:
Virtually all
mortgage borrowers go with a mainstream UK lender to make the biggest purchase
of their lives, it’s the done thing and to be honest most people don’t 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 dollars, 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 Yen 0.12%
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.
You’re 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 9/11 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
Euro/Sterling exchange rates were linked and increased and decreased at the
same rate, then it wouldn’t be a problem, but of course that’s not the
case.
If Sterling strengthened against the Euro, then you will be quids in. To repay
the loan, you wouldn’t need to convert as much Sterling into Euros, and you
would make a big saving. That’s 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. It’s 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, it’s a gamble and deserves
a lot of thought. It’s probably worth talking to a financial specialist about
it. There’s big savings to be made, but have you got the stomach for it?