Currency Mortgages

To find the best mortgage deals for overseas investments, you need to understand about currency exchange as this can, and will, affect both the value of the asset, and your repayments.

I cannot stress enough that most people fail to understand the significance or importance of currency exchange when it comes to buying or investing abroad. I do accept that many such assets are for pleasure only, but why not try to get the best of both worlds - if you can buy in a country you enjoy, and also make money on the investment from both capital appreciation and exchange rate movements - why not!! Please remember this is a specialists area so please consider your options carefully. As a currency trader I understand the risks.

Best Mortgage Deals - Currency Exchange Explained

Currency exchange rates can vary hugely, and from month to month, so if you have a currency mortgage your repayments will vary according to these changes. If you are lucky, your repayments will go down, if not they will go up! So how do we find the best deals, and protect ourselves from changing rates. If you would like to see an example of how the rates can affect your mortgage repayments, please follow the link here which gives an example in euros to pounds, but the same principle applies to any overseas mortgage.

Now whilst many people will be familiar with a foreign currency mortgage for buying assets overseas, few people realise that you can finance your home in the UK ( or elsewhere) with a mortgage denominated in a foreign currency. Instead of your lender providing the mortgage in UK pounds, the advance is set up in an alternative currency such as US dollars, Japanese Yen or Euros. Your mortgage debt remains in the foreign currency and interest is also charged in that currency, usually at the prevailing rate of interest for that country or zone, as opposed to the one denominated by the Bank of England. Although the debt is also paid off in the foreign currency, this is done by making appropriate monthly payments in UK sterling and selling this money on the foreign exchange.

Best Mortgage Deals - Advantages Of Currency Mortgages

The principle advantage of a foreign currency mortgage is simple - it gives you the opportunity to borrow money at a lower rate of interest than is possible in the UK, by choosing a country that has a lower rate than your home country. So why doesn't everyone have one? The simple answer is that lenders understand the risks, whilst most borrowers do not, and therefore the lending criteria tend to be aimed at high net worth individuals, or those earning substantial six figure salaries. Some lenders also require that you have an income in the designated currency. So what are the advantages? - if we have a look at the table above then the numbers speak for themselves I think. The minimum loan size is generally around £250,000 with a minimum income of £100k p.a. Proof of experience in the currency markets may also be required.

The advantages of such as mortgage can be twofold. Firstly you benefit from the lower interest rates as shown above, and secondly, IF the currency exchange rate goes in your favour( a big IF!!) - so what are the disadvantages ?

Best Mortgage Deals - Disadvantages of Currency Mortgages

In the example on euros to pounds  the monthly repayments on a 350,000 Euro mortgage would rise by almost £200 per month if the exchange rate of euros to pounds moved from 0.75 to 0.90. In addition the amount borrowed has increased from £245,000 to £315,000 - a huge increase of £70,000 in the amount owed - just on the exchange rate fluctuation. This is why finding the best mortgage deals is not really appropriate in this market, it's about having the right profile for the lender!! There is however one form of currency mortgage which is less risky called a multi-currency mortgage.

Best Mortgage Deals - Multi Currency Mortgages

Multi currency mortgages offer a slightly lower risk alternative to the single currency mortgage, as it provides the options to switch between currencies so that you can take advantage of currency movements. Supposing you originally borrowed in US dollars, but the dollar is strengthening and the pound is weakening, then the amount you owe and your repayments will be increasing. Let's assume the Euro is falling against both, then with a multi currency mortgage you have the option to switch it to euros to benefit accordingly. However, whilst this seems ideal, remember that there will be significant management and brokerage costs which could well wipe out any long term benefits gained so be careful.

This is a high risk specialist area, so please be careful. If you would like my thoughts on where a currency is heading, please just drop me a line via the ask Anna link above, or visit my currency trading blog.

Now let's look at a very different market, that of self build mortgages, and again I will try to suggest how to find the best mortgage deals for your dream home!

Best Mortgage Deals - next page