ECU in the media
FT Adviser - July 2007
Multi-currency mortgages turning from a yen to ‘a sterling idea’
Carry trades and multi-currency mortgages have gained impetus in the past few weeks following stabilising global bond yields and weakness in the Japanese currency.
According to Cormac Naughten, head of private clients for the ECU group, these involve low-yielding currencies being sold to fund purchase of riskier high-yielding assets elsewhere.
The yen has fallen to a record low against the euro, and has hit the weakest levels in 15 years against sterling, while plunging into a four-and-a-half-year trough against the dollar.
Mr Naughten said this had in turn led to an increase in high net-worth clients looking to take out cross-currency mortgages.
He said: “If a client's mortgage is based on a currency that falls against the pound, the size of the debt is reduced in sterling terms. Lower interest rates are achieved by placing client debt in currencies with lower interest rates than an investor's base currency. For UK private individuals borrowing against their main residence the benefits of the programme can currently be tax efficient.”
The ECU group is the UK's largest manager of multi-currency mortgages with £780m under discretionary management at 15 different banks and a successful track record in managing currency risk on behalf of institutions and high net-worth individuals.
The currencies available to the mortgage are sterling, yen, US dollar, euro, Swiss franc, Canadian dollar and Australian dollar. A client's mortgage is refinanced with a private bank that provides a multi-currency mortgage facility. Lenders include HSBC, Citigroup. and Kleinwort Benson.
The mortgage can be held in two currencies at anyone time and when switched into another currency, interest is paid at the rate applicable to that currency.
About 15 switches take place each year.
Tbe rate given is Libor plus 1.75 percentage points, giving an average interest rate over the last 10 years of 4.37 per cent.
For an individual borrowing against their primary residence, buy-to-let or commercial property, neither the interest rate nor the capital reduction of the loan is currently liable to capital gains tax.
However, Mr Naughten warned of the perils of the product. He said: "It is medium to high risk and clients need to take a long-term view of around three to five years. Clients that cannot afford a monthly payment 15 per cent higher need not apply. In an extreme example, a borrower that took out a yen loan equivalent to £1m in 1980 would have had an outstanding loan of £4.3m in 1995.
“However, a client taking out a £lm ECU managed multi-currency loan in 1988 would find that by 2003 the combined net benefits of debt reduction and interest rate savings exceed the amount borrowed.”
The minimum mortgage is £250,000, and it is available for UK residential, buy-to-let and commercial property.
The maximum loan to value is 70 per cent, although some lenders may go higher for the 'right' client.
The principle earners' income must be at least £100,000 and buy-to-lets require 125 per cent rental cover.
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ECU IN THE MEDIA
"How to take advantage of overseas interest rates."
The Sunday Telegraph
November 2006
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