Foreign Currency Mortgages

Borrowers have always been attracted to favourable interest rates prevalent in other countries. Although it is quite tempting to consider the cash flow benefits of low interest rate currencies, it should not be the only consideration when evaluating the suitability of a foreign currency mortgage facility. More importantly, it is possible to bring about a capital reduction from the movement in exchange rates or perhaps profit from a combination of both.

Multi currency mortgages are available in US Dollars, Euros, Japanese Yen, Swiss Francs, Australian Dollars and Canadian Dollars with a currency switch option.

Interest rates are calculated using the foreign currency's national equivalent of the London Inter Bank Offer Rate (LIBOR). Lenders will add anywhere between 0.8% and 1.75% to cover their costs and provide for a profit margin. Currency mortgages are 'variable rate' loans, which implies that your monthly payments will vary according to LIBOR equivalent rate fluctuations. Along with the potential for a lower interest rate, it is possible to take advantage of exchange rate movements to reduce your capital debt.

A weakening of your chosen currency would bring about a reduction in the sterling equivalent of your mortgage. Conversely, the strengthening of your preferred currency will increase your sterling equivalent debt.

Fortunately most lenders offer a currency switch option. This allows you to convert the debt into a favourable alternative if you have any apprehensions about the position and relative strength of your preferred currency.

Lenders 'buy' the currency for a limited period, normally between one week and three months. It is important to be aware that a currency switch will not take place until the end of the arranged LIBOR period. This is not necessarily an issue of concern, as you should avoid making abrupt movements between currencies.

Loans can be reduced or redeemed without an Early Repayment Charge after twelve months. If you wish to redeem the loan earlier, you'll have to pay a charge of £500 or less to cover the lenders costs.

Debt Reduction

It is possible to reduce your capital debt sooner if you manage your foreign currency mortgage well. The benefits from such a loan are obviously determined by economic conditions and exchange rate movements. Active management and good judgement are necessary to realise a potential gain from exchange rate movements. It is important that you are aware of the possible effects of currency fluctuations on your debt. The mortgage, though held in a foreign currency, is secured on an asset with a sterling value. The lender monitors the loan to ensure that the sterling equivalent of the mortgage does not rise to an unacceptable level a factor that should also be at the forefront of your mind.

For people who would like to avail the benefits of foreign currency mortgages but are unsure of their ability to manage it can use the services of professional currency managers. Their annual charges can be added to the loan amount, if preferred. One management company successfully managed a £1,000,000 sterling interest-only loan advanced in November 1988 into a credit balance of £206,884 by December 2007.

If you do not employ the services of a currency manager from the beginning and your circumstances subsequently change, it is possible to switch your foreign currency mortgage back to sterling or appoint a currency specialist to oversee the risk.

Foreign currency mortgages offer a unique opportunity to take advantage of exchange rate movements and potentially reduce your capital debt. For example, making a comparison over the same two-year period, a US Dollar loan equivalent to £500,000 would have reduced to approximately £425,000. A Euro debt would have increased to approximately £525,000 during the same period; however, significant monthly savings would have been made during the same period because of relatively low LIBOR equivalent interest rates.

There is scope to enjoy substantial success on the foreign exchange you could benefit from lower monthly repayments on account of favourable interest rates and reduce your sterling equivalent debt. Foreign exchange information and LIBOR interest rates are available from numerable sources, including broadsheet publications and the Internet. However, only consider taking out a foreign currency mortgage if you are capable and prepared to bear increases in your monthly repayments and capital debt.