What are the advantages of a foreign currency mortgage to me?

A foreign currency mortgage primarily offers two significant benefits to you, the investor:

1 Moving away from the UK offers you the potential to find a property with a lower mortgage interest rate, which in turn will reduce your monthly mortgage repayments.

2 Chose your country wisely and there is the potential to reduce your capital debt. For example: if your debt is in Euro’s and the Euro falls by 5% against the Pound (Sterling), then your mortgage debt is 5% smaller than on origination (excluding additional capital payments made).

What is the purpose of having a mortgage in a foreign currency?

1 Do you have a buy to let portfolio in the UK? You might be able to tap into substancial benefits via converting your current property lending and mortgages into a foreign currency mortgage.

2 Foreign currency mortgages can be arranged for acquiring your primary residence in the UK, for obtaining a holiday retreat abroad or even to borrow against your current primary residence. This may opens a greater selection of mortgage interest rates that may benefit you!

3 You are not alone! Many UK residents take out foreign currency mortgages when purchasing property abroad.

The intricacies of foreign currency mortgages explained:

Instead of taking out a mortgage loan in pounds sterling, the money is advanced in a mainstream currency, such as the Euro, US Dollar or Japanese Yen.

This debt value is converted to pounds sterling and is then used to pay off your current mortgage or purchase your new property, depending on which is applicable.

The mortgage debt remains in the foreign currency, although you may have the ability to switch between currencies and the interest is charged in that currency, generally at the prevailing rate of interest for that country.

The mortgage debt repayments are made in the same foreign currency; this is normally achieved by converting pounds sterling on the foreign exchange, this process is automated.

What might I gain through a foreign currency mortgage?

If you chose a country with a lower interest rate than the UK, you will be able to borrow at a lower rate of interest.

This should then generate large monthly savings. For example: A £150,000 loan repaid over 25 years, at 6.75 percent, would give you monthly repayments of approximately £1,050. If you borrowed the same mortgage in Japanese Yen, for instance, at a rate of 2 percent, then your monthly repayments would be around £650. This would be a staggering monthly saving of £400!

The result of such favourable exchange rates, if you maintain the payments at the sterling level, if this is possible with the lender, will be that the debt would be cleared earlier, with a lower total interest bill.

Also, due to the exchange rate, your outstanding debt is actually lower. For example: if your debt is in Euro’s and the Euro falls by 5% against the Pound (Sterling) then your mortgage debt is 5% smaller than when you started!

Mortgage companies on the continent often lend on much longer fixed terms than those in the UK. The average length of a fixed period can be anything from five to fifteen years in France and mortgages can be found with fixed periods lasting as long as twenty years in Germany.

This gives you the security of having a rigidly fixed long-term budget and knowledge of your repayment as far into the future as you could realistically need to.

Are there any risks?

Remember that the more that you borrow, the greater your exposure to risks and the more you could end up having to pay if the currency swings go against your favour. Given the relative strength of Sterling at the moment, it would seem that this risk is a fairly real one.

What other options are open to me?

The most risk reducing and currency exchange effect maximising, is to use a multi-currency switching facility. This gives you the opportunity to switch the currency in which the debt is held and the interest charged.

Be warned that broker commissions may eat into the potential gains to be made, this facility does afford you the opportunity to keep moving your debt into the most advantageous currency, depending on the prevailing rates of interest and the direction in which exchange rates are moving.

Our advice to you

Foreign currency mortgages should be viewed with caution and only astute investors who are prepared to tolerate the potential for increases in the size of repayments and debt should consider such loans.

What next?

The Property Banking team are waiting to offer you impartial and confidential advice on sourcing foreign currency mortgages. Call us now! 08704 28 28 29*