Every Tom, Dick and Harry knows that the total you pay for your home mortgage depends on the interest rate established by the Bank of England. If interest rates rise, so does the cost of lending and therefore the price of borrowing too. Which means you’ll get a letter from your bank or building society raising those monthly payments.
Because we borrow giant amounts to purchase home property, even minute fluctuations in the base interest rate (set by the Bank of England) can have a vast effect on our monthly mortgage payments. It’s no wonder that the chance to trim down the interest rate at which we pay off our loan is an attractive proposition for any homeowner.
International Interest Rates
Interest rates fluctuate from country – or monetary zone – to country. By tradition England has greater interest rates than are typically found in the Euro zone, American or Japan. Even today, when interest rates in the UK are exceptionally low, – around 4.5% - they are still high when judged internationally.
What is a foreign currency home mortgage?
Now, very few people realize that it is possible to take out a mortgage in a foreign currency – in, say, Japanese Yen or Euros. In so doing the borrower is charged at the interest rate of that currency. So it is possible for a British borrower buying a home in the UK to borrow in Euros and benefit from the lower cost of borrowing in the Euro zone.
How It Works
You take out a home mortgage in a foreign currency (e.g., Euros, US dollars, Yen or Swiss Francs). The bank/mortgage lender you borrow from changes this money into sterling and secures the debt against your house in the UK.
You pay the interest rate on the original foreign currency loan, i.e., you are paying at the interest rate of that country – which will hopefully stay much lower than good ole sterling.
The Advantages
There are two core benefits to borrowing in a foreign currency.
1) You can take advantage of those lower interest rates. This could lead to weighty savings. For example if you borrowed in Yen the difference in interest rates could be as much as 4%, or if you went for Euros, up to 2%. On a typical mortgage the potential savings could run into hundreds of pounds per month.
2) On top of any savings on interest payments you might benefit from currency markets as well. For example: If you are borrowing in dollars and the pound increases in value against the dollar, you’ll be able to buy more dollars for your pounds making a foreign currency mortgage even cheaper.
What could possibly go wrong?
Ah well now... A great deal. Remember the old saying about how investments can go down as well as up? Well this pertains, perhaps even more so, to the currency market and to the interest rates of various financial zones.
1. Currency rates are terribly unreliable. There is no guarantee that the currency that you have borrowed will remain the same in relation to sterling – it might go up but could go down. And that of course means that you lose money.
2. The same thing is true of interest rates. If interest rates increased in the currency zone of your choice again you could see yourself purchasing more. And there is no protection against these increases. In fact the risks are such that less than 1% of home mortgage borrowers have checked out this.
Other Problems
There are other problems associated with borrowing in a foreign currency:
• Most lenders will offer a maximum of 75% of the loan – compared with 90% or even more in the UK. So you have to find a more considerable deposit to cover your house purchase.
• There are additional administration expenses which will cut into any savings made.
• Lower interest rates set by the central bank in a region don’t always mean lower borrowing rates. In fact, because of the immense competition in borrowing in the UK and the amountof borrowing demanded to buy property, lending rates are not so different to those available in the Euro zone and other low interest currency zones.
Helpful Tips
If you are interested in foreign currency mortgages, here are some tips to help reduce the risk:
• Remember that this is a high-risk strategy – you must be able to afford to take losses if things go badly. The smug charmer I mentioned worked in the City and was obviously rich – despite apparently having a small brain.
• Talk to a professional consultant before going ahead with any transaction.
• Preferably approach a UK lender that deals with foreign currency mortgages. Not many do.
• In some countries (such as Germany) fixed rates over long periods (up to 20 years) are much more typical than they are here – this kind of mortgage could offer some protection against interest rate rises.
• Look at ways of spreading out the risk. One possible choice is multi-currency mortgages. Borrow portions of your mortgage from a selection of interest rate zones and currencies – you may lose in one but you’re unlikely to lose in all.
Another possible solution is a multi-currency switching facility where you can switch out of a currency that is falling or away from an interest rate that is increasing. However this kind of scheme is costly to keep on top of – broker commissions for each transaction will add up and if you use a management company there will be more fees. Running such an account yourself would require time, dedication and skills - unusual in an amateur investor.
Enter the Euro Zone
You might be tempted to borrow in Euros in the belief that the UK will, eventually, enter the Euro zone anyway.
At the moment, however, entry to the Euro zone seems more and more unpredictable and it would be rash take risks based on this type of forecast.
Of course, some people are employed by multi-national companies who can pay salaries in Euros. For these people borrowing in Euros presents less risks - but it is still necessary to take professional advice before doing so.
Summary
In conclusion, despite the possible savings, foreign currency home mortgages are not for the faint hearted.
Remember, you are borrowing a vast sum when you get a home. Risking it all in the threatening waters of the international money market is a option that should not be taken lightly.
Finally
Don't forget old Ma Mortgage Sorter's Golden Rule: Always get three quotes when buying any UK financial home mortgage product.
This article is written by Mortgage
Sorter, a UK mortgages website that
has been helping normal people understand UK mortgages
for over five years. The website has a special section on
UK
mortgages for people with a bad credit history and features the top
current mortgage rates
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