Foreign Currency Mortgages - the pros and cons

Author: Anna Richardson

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mainstream UK lender to make the biggest purchase of their lives, it's the done thing and to be honest most people don't ( cheap car insurance ) realise there is a viable alternative - the foreign currency mortgage.

Interest rates are reasonably healthy in the UK at the moment, particularly in comparison with the 1980s, however interest rates are a lot higher here than they are in the Eurozone, ( remortgages ) Switzerland, America and Japan.

Did you know that you can borrow the capital you need for your house purchase in ( home insurance ) Euros, US dollars, Swiss Francs or Yen instead of Sterling? This means that you could take advantage of the lower interest rates elsewhere, securing the loan on your house.

These 3 month money market interest rates allow you to compare UK interest rates with other countries:

Japanese Yen 0.12%

Switzerland 1.03%

Eurozone 2.46%

US $ 4.48%

Sterling £ 4.64%

(Source: 3 month Money Market Rates, Financial Times, 9 Dec 2005)

As you can see, Sterling is significantly higher than some of the others. ( cheap loans ) However, you will lose out on some of that advantage because you will pay a premium to borrow currency from another country. Still, if interest rates continue as they are at the moment, then there are still large savings to be made.

You're probably wondering why, if the savings are so good, only 1% of UK householder mortgages are taken out in overseas currencies? Unfortunately, there are other factors to consider.

Interest rates - can be unpredictable and even though they have been stable for years, anything unexpected could happen to affect them (eg the 9/11 attacks). If interest rates in the country you were borrowing from increased, then you would lose a lot of the advantage between the foreign currency mortgage over the standard UK mortgage.

Exchange rates - herein lies the most unpredictable area of risk. Because you borrowed in Euros, for example, the loan must be repaid in Euros. If the Euro/Sterling exchange rates ( insurance ) were linked and increased and decreased at the same rate, then it wouldn't be a problem, but of course that's not the case.

If Sterling strengthened against the Euro, then you will be quids in. To repay the loan, you wouldn't need to convert as much Sterling into Euros, and you would make a big saving. That's the scenario that makes the foreign currency mortgage so attractive.

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