If you think that because your mortgage is a debt, you can't make money out of it, it's time to think again.
Suppose that you had switched a £100,000 mortgage from sterling to US dollars when the exchange rate was $1.50.
Your mortgage would now be $150,000. But at today's exchange rate of $1.82, it would cost you only £82,000 to pay off the loan.
Several lenders enable you to borrow in foreign currencies, but few people would want to manage the currency switches themselves. So how about getting someone to manage the currency switching for you?
This, in a nutshell, is what The ECU Group does. Its multicurrency mortgage loan is managed by the group's currency team. They deal for a lot of clients, so they get inter-bank exchange rates, far more favourable than you get on the high street.
They are not wheeler-dealers but look for long-term trends and make on average about six currency switches a year. Their audited performance data shows that over a 15-year period between November 1988 and November 2003 the gains made from these switches actually paid off a mortgage.
A multi-currency mortgage could pay off your debt faster
ECU says it has two objectives, to reduce the value of the outstanding debt and to reduce the interest payable by borrowing in currencies that have lower interest rates than sterling ones. Over the last few years, the US dollar has served well on both counts, since it has been possible to borrow at 2-3% while the value of the dollar has fallen over 20% against sterling.
However, currency markets are notoriously fickle and prone to swings in sentiment, so ECU says currency loans are only suitable if you can afford to see the value of your debt increase by up to 20%. And it is not a short-term proposition, since its minimum term is five years.
ECU charges a minimum £2,500 a year (1% on £250,000) plus 20% of the net profit achieved over the period of the loan, defined as the overall saving in interest plus reduction in capital. So long as there is a wide gap - as at present - between what you have to pay for a mortgage in sterling and what it can cost in US dollars or euros, a UK borrower an be better off with a multi-currency loan even without currency gains.
But the smart users of ECU's system don't do it to cut their monthly mortgage costs - they keep on paying in the same sum each month to their mortgage account. They use the system to pay off their mortgage early, thus saving a bundle in interest and generating additional capital.
This is an interesting alternative to traditional mortgages for those who are prepared to accept an element of risk.
Foreign exchange movements can be sudden and substantial. At no stage should you expose yourself to the high risks of foreign currency exposures if you are not able to afford the potential losses that could result from sizeable adverse currency movements and the higher interest rate servicing costs that would be required of you in the event of your having a larger debt.
Denominating debt in foreign currencies may not be suitable for you. Changes in the exchange rate may increase the sterling equivalent of your debt. Your lender will not tolerate too great an increase in the sterling equivalent of your debt as a result of currency losses and may opt to convert your debt back into sterling at a predetermined level. This may result in a permanent increase in the sterling equivalent of your debt which is not fully compensated for by any other benefits derived during the course of The ECU Group plc's discretionary currency debt management services. In this event, you could be left paying UK interest rates on a larger amount of sterling debt than that you originally borrowed. Your home may be repossessed if you do not keep up repayments on your mortgage.
Your lending bank sets a 'Conversion Limit' at which level they have the right to convert your managed multi-currency mortgage back into sterling to prevent further currency losses. It is important to understand that this is a right of your lending bank and not an obligation and that if they do not act promptly to convert your loan back into sterling when your Conversion Limit is reached, your loan could increase by more than that specified by your Conversion Limit.
ECU may from time to time transfer your loan into foreign currencies with higher interest rates than sterling with the objective of achieving a debt reduction in that currency.
Sterling interest rates are subject to change and the differential between sterling interest rates and the interest rates of other foreign currencies will fluctuate.
Suitability
The markets or financial instruments discussed herein may not be suitable for all investors and investors must make their own investment or participation decisions using their own independent advisors as they believe necessary and based upon their specific financial situation and investment objectives. Past performance is not a reliable indicator of future performance, and should not therefore form the basis of a decision whether or not to buy or sell any investments or financial instruments or to participate in any particular trading strategy mentioned herein.
The UK Regulatory System
The ECU Group plc ("ECU") is authorised and regulated by the Financial Services Authority.
In respect of managing physical liabilities in foreign currencies, ECU trades the foreign exchange markets on a spot basis and issues switch instructions to lending banks on a spot basis. Neither of these activities is currently regulated by the Financial Services & Markets Act 2000 as they meet the "Commercial Purposes" test. Therefore you will not benefit from the protection of the Financial Services and Markets Act 2000.
However, if ECU instructs the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, to conduct a switch by way of effecting an “option” or “futures” transaction for the Client’s account, such transactions may be considered to be an “investment of a specified kind” under the Financial Services and Markets Act 2000. Consequently, both the execution process provided by the Lender, or any prime broker or counterparty with whom ECU effects foreign exchange transactions, and the currency management services provided by ECU, as envisaged under this Agreement, may be considered to be regulated activities. In such instances, the Client may be required to sign additional risk warnings and the rules for the protection of investors under the Financial Services and Markets Act 2000 will apply.
Other Important information
This website is maintained by ECU and is being issued inside and outside the United Kingdom by ECU for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any investments or financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations. ECU may not respond to requests for information or further assistance if, in the opinion of ECU, such action might be illegal or contravene any rule or regulation of any jurisdiction.
The views and foreign exchange and interest rate information in this website are based upon information from sources which we believe to be reliable but they are not guaranteed as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. Any contractual obligation between ECU and its clients will only be on the basis of undertakings contained in an ECU client agreement executed by both ECU and the client, as may be amended from time to time by ECU, and which may vary from any information contained herein. Products and services may be subject to material changes at any time from the information herein. ECU aims to ensure that all information herein is accurate at time of printing, but does not accept any responsibility for its accuracy.
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If you think that because your mortgage is a debt, you can't make money out of it, it's time to think again.
