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.
The 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 £1m 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.
Trading in foreign currencies is not suitable for everyone and a client must ensure that they fully understand the risks involved before proceeding. A client should consult their financial adviser if they have any doubts about their suitability or the risks involved. Foreign exchange movements can be sudden and substantial. At no stage should a client expose themselves to the high risks of foreign currency trading if they are not able to afford the potential losses that could result from sizeable adverse currency movements. Past performance is not a reliable indicator of future performance.
Please note that for compliance purposes telephone calls may be recorded.
Specific additional risks for our currency management products are as follows:
Private client multi-currency mortgages
a) At no stage should a client be exposed to the high risks of foreign currency borrowings if they are unable to afford the potential losses that could result from adverse currency movements and the higher interest costs that would arise from having a larger loan.
b) A client’s lender will not tolerate an increase in the GBP value of a client’s loan above a predetermined level as a result of currency losses. The lender will agree a “Conversion Limit” with the client before a client takes out an ECU managed multi-currency loan. If the loan reaches or breaches its “Conversion Limit”, the lender may exercise its right, but not its obligation, to convert the loan back into GBP. However, a loan may be converted back into GBP at a worse level than the agreed Conversion Limit. This would mean that a client’s loan would increase by more than it would if it had been converted at the agreed Conversion Limit. Converting a loan back into GBP may result in a permanent increase in the GBP value of a client’s loan and the associated GBP interest costs.
c) The FSA risk warning is “Your home may be repossessed if you do not keep up repayments on a mortgage”.
Corporate loan management
a) At no stage should a client be exposed to the high risks of foreign currency borrowings if they are unable to afford the potential losses that could result from adverse currency movements and the higher interest costs that would arise from having a larger loan.
b) A client should be aware that their lender may not tolerate an increase in the base currency value of a loan if it exceeds a certain level and will have the right to convert the loan back into the base-currency.
Managed FX accounts
a) A Managed FX account is a margin account which is not suitable for everyone. A client must ensure that they fully understand the additional risks involved in margin trading.
b) A client should be aware that their lender will require additional margin to be paid on demand and will have the right to close any open positions if this additional margin is not promptly paid.
c) As with all margined products it is possible to incur significant losses and to lose more than the margin in the account at any one time.
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.
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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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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.
