Mortgage Foreign Currency – Pros and Cons
Virtually all mortgage borrowers use major UK lenders to make the biggest purchases in their lives. That is something that has already been done and honestly, most people do not realize there are viable alternatives – foreign currency mortgages.
Interest rates are quite healthy in the UK today, especially compared to the 1980s. However, interest rates are much higher here than in the eurozone, Switzerland, America, and Japan.
Did you know that you can borrow the capital you need to buy your home in Euros, US dollars, Swiss Francs or Yen, not Sterling ?. This means that you can take advantage of lower interest rates elsewhere, securing loans in your home.
This 3-month money market interest rate allows 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: Money Market Interest Rate 3 months, Financial Times, Dec 9, 2005)
As you can see, Sterling is significantly higher than the others. However, you will lose some of that profit because you will pay a premium to borrow currencies from other countries. However, if interest rates continue as they are now, then there are still big savings that must be made.
You might wonder why, if the savings are very good. Only 1% of homeowners’ mortgages in the UK are taken in foreign currency? Unfortunately, there are other factors that need to be considered.
Interest rates – can be unpredictable and even though they have been stable for years. Anything unexpected can affect them (eg 9/11 attacks). If the interest rate in the country where you are borrowing increases, you will lose a lot of profits between a foreign currency mortgage and a standard UK mortgage.
This is where the most unexpected risk fields lie. Because you borrow in Euros, for example, loans must be paid in Euros. If the Euro / Sterling exchange rate is associated and raised and lowered at the same level, then that won’t be a problem, but of course, that’s not the case.
If Sterling strengthens against the Euro, you will enter. To repay a loan, you don’t need to convert as much Sterling to Euros, and you will save a lot. That’s the scenario that makes foreign currency mortgages so attractive.
However, if Sterling falls against the Euro, you will get out of the bag, having to pay more effectively than you borrowed before. This is a big gamble, and your home will depend on it. Your home will be under the authority of exchange rates, so you can win, or lose, a large amount of money.
To get a foreign currency mortgage, you need a minimum deposit of 20% for your home purchase. So you have to have a good cash flow to manage it.
There is an alternative above, one that represents a smaller risk. You can link your UK mortgage to interest rates in other countries. This means that you are not betting on the exchange rate, but you will still be charged interest, with the hope that they will not exceed the value of British interest. There is a little risk involved, however, this kind of mortgage binds you for a longer period of time. That is 5 years, and the ransom will be more than nominal. There is a certain degree of flexibility, and you can often transfer the mortgage to another property if you want to pay the loan early.
The above options are very popular with mortgages associated with Swiss Franc interest rates because their interest rates have remained below 1% for the past four years. Eurozone interest rates are also very stable and have not moved in five years.
Whatever your decision is, and even with a British mortgage, it’s a gamble and worth thinking about. Maybe you need to talk to a financial specialist about that. There are a lot of savings that need to be done, but do you have that desire?