Summary

Foreign currency mortgages could save you a lot of money but the risks are high. This article explains.

Foreign Currency Mortgages - what are they and what are the risks?

Author: Michael Challiner

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in pounds sterling and pay the prevailing UK based interest rate. But it does not have to be that way....

Whilst by its' own historical standards, the UK's domestic interest rates are low, they are still significantly higher than in the Eurozone, America, Switzerland and indeed, Japan. ( secured loans ) Therefore, you can currently borrow the money you need in Euros, $ dollars, Swiss Francs or Yen, secure the debt against your house in the UK and pay a much lower rate of interest.

The following 3 month money market interest rates illustrate the extent to which UK interest rates are ahead of other parts of the world:

Sterling £ 4.64%

US $ 4.48%
Eurozone 2.46%
Switzerland 1.03%
Japanese Yen 0.12%

(Source: 3 month Money Market Rates, Financial Times, 9/12/05)

But don't expect to borrow money for your mortgage at these 3 month Money ( home insurance quotes ) market rates. You will have to pay a premium for borrowing in an overseas currency. Nevertheless, if interest rates remained as they are now, there will still be significant interest rate savings to be made.

So why are less than 1% of UK domestic mortgages taken out in overseas currencies? The answer: there are extra risks.

Interest rates could buck historical trends and narrow the gap between sterling based rates and the rates for the currency in which the mortgage has been borrowed. This would ( life insurance quotes ) reduce the interest rate saving and indeed, at some stage, could make the interest rate more expensive than for a standard £sterling mortgage.

But by far the biggest risk lies' in changes in exchange rates. If you have ( life insurance quotations ) borrowed in say, Yen, you eventually have to repay the loan in Yen. That would be fine if the Yen/Sterling exchange rates were frozen together - but they aren't.

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