Foreign Currency Mortgages for UK Homeowners
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 increase, so does the price of lending and therefore the price of borrowing too. Which means you’ll receive a letter from your bank or building society increasing those monthly payments.
Because we borrow gigantic amounts to buy real estate property, even miniature fluctuations in the base interest rate (set by the Bank of England) can have a sizable influence on our monthly mortgage payments. It’s no wonder that the chance to slash the interest rate at which we pay off our loan is an appealing aspiration for any homeowner.
International Interest Rates
Interest rates differ from country – or monetary zone – to country. Customarily England has greater interest rates than are commonly seen 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 compared 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 an British borrower purchasing a house 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 mortgage in a foreign currency (e.g., Euros, US dollars, Yen or Swiss Francs). The bank/mortgage lender you borrow from switches 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 remain much lower than good ole sterling.
There are two principal benefits to borrowing in a foreign currency:
1) You can take advantage of those lower interest rates. This could lead to important savings. For instance 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 home 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 purchase more dollars for your pounds making a foreign currency mortgage even cheaper.
What could possibly go wrong?
Ah well now... Much. 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 financial zones.
1. Currency rates are notoriously unreliable. There is no guarantee that the currency that you have borrowed will stay 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 upward fluctuations. In fact the risks are such that less than 1% of home mortgage borrowers have checked out this.
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 home purchse.
• There are additional administration costs which will eat 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 enormous competition in borrowing in the UK and the sum of borrowing required to purchase property, lending rates are not so different to those available in the Euro zone and other low interest currency zones.
If you have an interest 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 poorly. The smug charmer I referred to worked in the City and was obviously rich – despite apparently possessing a small brain.
• Talk to a competent consultant before advancing ahead with any transaction.
• Ideally approach a UK lender that deals with foreign currency mortgages. Not many do.
• In some countries (such as Germany) fixed rates over advanced periods (up to 20 years) are much more common 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 option 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 possiblity 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 rising. However this kind of scheme is expensive to keep on top of – broker commissions for each transaction will add up, and if you use a management company there will be additional fees. Running such an account yourself would require time, dedication and skills not normal 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 uncertain and it would be rash take risks based on this kind 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 essential to get professional advice before doing so.
In conclusion, despite the possible savings, foreign currency mortgages are not for the faint hearted.
Remember, you are borrowing an enormous amount when you buy a home. Risking it all in the hazardous waters of the international money market is a decision that should not be taken lightly.
Don't forget old Ma Mortgage Sorter's Golden Rule: Always get three quotes when buying any UK financial mortgage product.
About the Author: This article is written by Mortgage Sorter, a UK mortgages website that has been helping normal people understand UK mortgages for over five years.