Are you a UK Landlord with a property portfolio? How to get your foot in the door of Foreign Currency Mortgages. The windfalls and pitfalls, the opportunity to save on mortgage payments and a faster path to owning your own home.

Why a foreign currency mortgage?
There are two basic and significant benefits that may arise from a foreign currency mortgage:

1. Interest Rates & Mortgage Repayments – The potential to obtain a lower mortgage interest rate and thus reduce the monthly mortgage payments.
2. Debt (Capital) Reduction – The potential to reduce the capital element of your mortgage. 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)

Purpose
1. If you have a buy to let portfolio in the UK there may be significant benefits in converting your current property lending/ mortgages to a foreign currency mortgage (see actual example below).
2. Foreign currency mortgages are frequently used by UK residents when buying overseas properties.
3. Foreign currency mortgages can be arranged for purchasing your primary residence in the UK – Or to borrow against your current primary residence.

How does it work?
Rather than your mortgage loan being made in Pounds (Sterling) the money is advanced in a ‘mainstream’ currency such as the Euro, US Dollar or Japanese Yen. The debt value is converted to pounds sterling and this amount is then used to pay off your current mortgage or purchase your new property (whichever 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) payments are made in the same foreign currency; this is normally achieved by converting pounds sterling on the foreign exchange (this process is automated).

Potential Advantages
Borrowing at a lower rate of interest - By selecting a country that has a lower rate of interest than the UK.

Huge Monthly Savings – 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!

Clear the Debt early – As a result of such favourable exchange rates if you maintain the payments at the sterling level (if this is possible with the lender) then the debt would be cleared earlier with a lower total interest bill. In addition 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 on origination.

Continental Mortgage Companies - continental lenders often lend on much longer fixed terms than UK mortgage companies. 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.

Potential Risks
The more that you borrow, the greater your exposure to the risk 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.

Potential Windfalls
Given the volatility of the foreign exchange markets, these fluctuations can be quite sizeable. At one point in 2000, the Euro had declined almost ten percent against Sterling in less than a year, meaning tens of thousands of pounds knocked off the total repayment bill for any lucky British residents who had earlier taken out a Euro mortgage!

Multi currency mortgages
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.

Advice
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 discuss the pros and cons of sourcing foreign currency mortgages. Call one of our team on 08704 28 28 29*