Why Foreign Currency Mortgages?

Nearly all UK mortgage borrowers engage a mainstream lender in the domestic market to make the biggest purchase of their lives, and pay the prevailing UK interests up to 6.9%. It's what everyone does and most people are unaware of a viable alternative's the foreign currency mortgage. Although the markets have witnessed a few fluctuations recently, the UK interest rates are currently reasonably healthy at 5.95%.

Despite the recent increase, the UK's domestic interest rates continue to be low by its own historical standards; however, they are still considerably higher than the rates in the Euro zone, America, Switzerland and Japan. Therefore, taking out a mortgage in Euros, American Dollars, Swiss Francs or Japanese Yen will allow you to convert the money you've borrowed into sterling pounds, secure the debt on your house and take advantage of the lower interest rates.

The sterling is noticeably higher than most of the others; however, you wouldn't be able to borrow money for your mortgage at these rates since you will need to pay a premium to borrow currency from another country. Nevertheless, if interest rates continue as they are at the moment, you could still leverage the difference to make substantial savings.

You're probably wondering why virtually everyone in the UK still chooses a domestic UK mortgage. Unfortunately, there are a few other factors to consider.

Interest Rates

Even though they have been stable for years, interest rates are volatile and you shouldn't be surprised if they do an about-turn after an unexpected event, such as 9/11 attacks. An increase in the interest rates of the country you have borrowed from would imply reduced savings in interest. Continuance of such a trend could make your interest rate more expensive than the standard sterling rate and your mortgage could end up costing even more than a standard UK mortgage.

Exchange Rates

These are extremely unpredictable and therefore carry the maximum risk. If you take out your mortgage in Euros, for example, you must repay the loan in Euros. Exchange rates wouldn't pose a serious threat if the Euro/Sterling exchange rates were linked and increased and decreased at the same rate; however, that is not the case.

It Sterling strengthens against the Euro, you'll probably laugh all the way to the bank as you wouldn't need to convert as much Sterling into Euros and make a big saving. This is one of the major reasons foreign mortgages are such an appealing investment option.

Conversely, if Sterling falls against the Euro, then you might find yourself tapped out after repaying effectively more than you initially borrowed. Herein lies the big gamble and your home will be at the mercy of exchange rates: you could win or loose a significant amount of money.

To acquire 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 cash flow to arrange it.

Foreign currency mortgages aren't as risky as they seem to be: there is an alternative that carries lesser risk. It is possible to link your UK mortgage to a different country's interest rate: this minimizes the risks associated with exchange rate but you will still be subject to the interest rate, in the hope that it will not at any point exceed the UK interest rate. Although the risk involved is lesser, such mortgages stretch longer, i.e. 5 years, and the redemption penalties are usually more than nominal. Such foreign mortgages do lend a certain degree of flexibility, however, and it is possible to transfer the mortgage to another property if you want to pay the loan off early.

The above option is especially popular with mortgages linked to the Swiss Franc interest rate, since their interest rates have stayed below 1% for the last four years. The Euro zone interest rate is also quite stable and has not moved in 5 years.

Whatever decision you take, foreign mortgages including UK mortgages are a gamble and deserve a lot of thought. If you are unsure of managing the risks yourself, it is worth talking to a financial specialist about it. There are big savings to be made, but make sure you take the plunge after some deliberation.