ECU IN THE MEDIA
Evening Standard - July 2004
Bet your bottom dollar
Bet your bottom dollar
If you have the nerve to ride out currency fluctuations, Lorna Bourke suggests a mortgage that could pay for itself in 10 years
One of the most attractive deals available is the "currency" mortgage from ECU Group. You generally pay a lower interest rate than on a normal UK sterling mortgage, and, if ECU Group currency managers get it right, and so far they largely have - then your mortgage is reduced without you repaying anything at all. Over a 10 - 15 year period, it is possible to see your debt totally wiped out.
The way it works is that ECU managers try to reduce your debt by switching your loan into different currencies to take advantage of movements in the rates of exchange. For example, you might have signed up for a home loan of £100,000 in the spring of 2001. The currency managers might have decided at the time that the US dollar was going to slide. So they could have switched your mortgage into dollars at 1.40 to the UK pound, giving you a debt of $140,000 (This is not necessarily what ECU Group did).
This month, three years on, the currency managers could decide to switch back to sterling at the current rate of about $1.80 to the pound. Your debt in sterling terms would now be reduced to £77,777 - without you paying back a single penny.
Now here's the catch: you have to have enough ready cash so that if the managers get it wrong, you can afford either to get out of the scheme, or sit tight until things improve. The maximum loan-to-value is 75 per cent, which means that if you exceed this level, you must stump up the cash to reduce the debt.
"If a borrower would be in difficulties with, say, a 15 per cent increase in his or her debt, then they should not be considering this scheme," warns Cormac Naughten of ECU Group. "What we advise borrowers to do is set aside each month the interest they would be paying on an ordinary sterling mortgage. In addition, they should put ay profit they have made by way of reduction in debt into a suspense account (a temporary account for money on the move)." This money can then be used as a safety net, should the currency managers make a mistake.
Overall, the ECU Group has a creditable track record, so far. If you had taken out a currency mortgage with the Group a year ago, your debt would have been reduced by 13.06 per cent by now, and because you would have paid a lower interest rate on the borrowing, your overall saving would be 16.02 per cent.
Longer term, had you taken out a loan with ECU Group three years ago, your debt would have been reduced by a thumping 23.35 per cent, and the overall saving, including lower interest payments, would have been 32.19 per cent. For those who borrowed eight years ago, their debt reduction would be 41.26 per cent, and the overall saving 71.21 per cent.
Mike Boles, of mortgage broker Savills Private Finance, believes that currency mortgages are for the sophisticated borrower looking for loans of £500,000 and upwards.
He says, "Most borrowers are looking to keep their repayments to a minimum and, although the interest charged on an ECU mortgage has been lower than on a sterling mortgage, the risk of the debt increasing means you have to keep a cash float available, or have plenty of equity in your property to ride a storm. Not everyone can meet these requirements."
Boles quotes the example of Savills Private Finance client who wants a £450,000 reportage on a property worth about £1 million. "We have an exclusive offer of a Bank of England base rate minus 0.51 per cent for two years, which gives a pay rate of only 3.99 per cent," he says. "This mortgage has no penalties for early repayment at the end of the two year discount, and the arrangement fee is £699. Monthly outgoings no an interest-only basis on a £450,000 mortgage are £1,497.25."
Compare this with the ECU Group mortgage, which is currently split between Yen and US Dollars. The payable interest rate is 0.55 per cent, plus a 1.5 per cent charge, making a pay rate of 2.06 per cent. Monthly payments work out at £769. In addition, there is an arrangement fee of 0.5 per cent of the amount borrowed (£450,000), which works out at a hefty £2,250.
There are also management and performance fees. The annual management charge, payable monthly, is calculated on a sliding scale according to the size of the loan. For a loan of £450,000 it is £4,200, or £375 a month. So overall monthly outgoings are £769, plus £375, which works out at £1,144, that is £281 a month cheaper than the SPF deal [ECU performance figures to June 1, 2004].
But it may well not stay that way, and you also have the risk of the currency gambles going wrong.
An annual performance fee may also be payable to ECU if it manages to reduce your debt, and this is calculated as 20 per cent of the net profit achieved, including interest charges on the mortgage. This has to be paid on an annual basis. With either loan there will be the usual valuation costs (about £950) and legal fees.
Homebuyers who have taken out an ECU Group currency loan, and stuck with it through the bad times, have done well. But you have to be grown up about money, accept the risks involved, and, above all have some spare case you can call on if you hit a bad patch.
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