ECU IN THE MEDIA
Financial Times - April 2002
Personal Finance - A yen for slashing your interest rate
Personal Finance - A yen for slashing your interest rate
If you are attracted by an interest-only mortgage where your debt is reduced and your monthly payments are below the going rate - think Japanese yen, USDollar or Swiss francs. Deborah Hargreaves explains you could even choose a mortgage featuring all of these.
But these are not for everyone. "if you're going to be up at 3am with the remote in your hand, looking at the exchange rates on teletext, or on the phone checking up, the benefits of this type of mortgage are going to be outweighed by the heartache along the way." Says Cormac Naughten, head of ECU group's private client division..
The group also has fairly narrow criteria for the sort of clients it will accept. It will only offer the multi-currency option to those who earn more than Pounds 75,000, want a loan of more than Pounds 100,000 and have a debt - to - equity ratio of less than 65per cent in their home. The group only offers the facility for residential mortgages, but these include buy-to-let.
For borrowers with the stomach for risk, the benefits can be considerable. ECU, which has been offering these sort of mortgages since 1988, has managed in that time to reduce the notional capital on Pounds 100,000 mortgages to Pounds63,640, according to independently audited figures.
If you include the benefits of lower interest rates, the group points to total savings over that period of Pounds 96,030. The average interest rate was just over 6 percent, compared with 9.8 per cent for a similar sterling mortgage.
The figures do not include the performance fee charged by ECU, which is 15 per cent of the net profit achieved by borrowers each year. The net profit is the combination of debt reduction and net interest rate savings, minus any management fees and currency switching fees charged by the banks involved.
However, while these figures look impressive, the size of debt and monthly payments can fluctuate wildly over short periods. ECU is unwilling to accept clients who cannot withstand a permanent 20 per cent increase in the size of their loan. "Our performance certainly hasn't come without periods where things haven't gone right, "says Naughten.
The sterling equivalent of a foreign currency mortgage will rise or fall depending on the exchange rate of that currency against the pound. If the chosen currency strengthens against the pound, the sterling equivalent of the loan will rise and vice versa.
Naughten cites sterling's withdrawal from the European exchange rate mechanism in 1992 as the worst period for borrowers when the pound weakened and many clients saw their loans increase by 38 per cent. The period from late 1992 to 1995 was a difficult time for the company. "We've had people come out at that point," Naughten says, "and it's very galling for them to watch while the loans fell subsequently."
The private banks for whom ECU group organises the currency facility, will automatically switch borrowers back to sterling if their loan increases by more than 20 per cent. Some clients then have to put up additional security to stay in the product. ECU switches borrowers into different currencies five to six times a year, looking to exploit market opportunities spotted by its investment committee of leading currency analysts. The group always tells clients when it has switched currencies and which one their loan is currently denominated in.
Borrowers are currently in yen and have seen a 13 to 14 per cent reduction in the sterling equivalent of their debt since November - the current interest rate is just over 2 per cent. While standard mortgage rates are very competitive right now following the decline in base rates, borrowers are using ECU to help reduce the size of their debt.
Naughten suggests borrowers base payments into their mortgage account each month on an interest rate of 5.75 per cent. While the actual payments may be much lower than that, the savings then accumulate in the account and can be used towards paying of the loan early.
Borrowers arrange the mortgage with one of a group of private banks - their repayments are interest-only and are paid either every quarter or monthly. They have to make other arrangements for paying off the loan at the end of the term, even though ECU aims to have managed it down by then.
Banks charge a fee for switching currencies that ranges from £50 to £125 and is payable every time the currency is changed. ECU group also levies a management charge on a sliding scale - 1 per cent for a mortgage of £150,000 down to 0.25 per cent on £10m or more. But both of these charges can be offset against the performance fee - tying ECU group's profits closely with clients' interests.
However, borrowers considering this sort of mortgage should discuss what might happen if Britain were to join the euro in the next decade. Naughten is sanguine about the possibility. He does not believe the pound will face a large devaluation to join the euro. Buying this sort of mortgage is a bit like investing in the stock market: borrowers should be prepared for the long haul.
The group compares its approach to the mortgage debt with the kind of asset management bought by investors for their share portfolios - both of which should be long-term products.
"Our view is that, if you have your assets professionally managed, then why not your debts too? After all, a pound is a pound, whether it has a plus or minus sign in front of it," says Michael Petley, chief executive of ECU.
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