Most people who own stocks and shares actively manage their portfolio in a bid to generate superior returns. But very few people take such an active approach with their debt. Robert Budden talk to Paul James, one of these few people.

A sales director for a Norwegian telecoms company, Paul decided early on that he wanted to do something a bit different with his mortgage.

"I did a lot of research in What mortgage magazine," he says. "I ignored all the glossy ads and spotted an interesting small ad in the back."

The ad was for a company that offered foreign currency mortgages. The company was MacIntyre Hudson Currency Management, then part of the larger accountancy practice of the same name, and it sought to achieve two key aims. The first was to seek out foreign currencies where interest rates were lower than sterling so that monthly interest repayments were lower than on a typical UK mortgage. But MacIntyre also sought to switch debt into currencies that looked set to fall in value relative to sterling in a bid to trim the outstanding mortgage debt.

The strategy was partly successful and meant Paul enjoyed lower monthly outgoings. "They did not do a great job on debt reduction but they did quite a good job on interest rates," he recalls.

But in 1995, MacIntyre was bought by the ECU Group, specialists in currency debt management services. And with this sale, Paul's mortgage was also transferred to the ECU.

Since then, apart from a few minor hiccups, foreign currency fluctuations have moved dramatically in his favour. His mortgage debt has risen in sterling terms from £123,667 just over 10 years ago to just under £250,000 currently. But this is only because Paul has decided to cash in "profits" from currency moves by making over £226,000 in cash withdrawals. This cash has been used partly to fund the building of his own home and partly to build a buy-to-let property portfolio.

"The pension market took a bit of a nose dive. So in March 2003 I borrowed up to the maximum loan limit and took out £80,000 to go into buy-to-let [properties]," he explains.

"We've now got two properties in the UK and a studio apartment in France."

Paul's long-term aim is to purchase a portfolio of four buy-to-let properties, partly funded by the profits from his foreign currency mortgage and partly funded with separate buy-to-let interest-only mortgages. In 10 to 15 years time he plans to sell two of these properties and use the proceeds from any gains in prices to pay off the mortgages on the remaining two properties. The rental income from these properties will then be used to supplement his retirement income.

His foreign currency mortgage has been key to this long-term strategy. Timely moves in and out of foreign currencies by ECU over the last decade have enabled Paul to accelerate the debt repayment plan on his main property. ECU adopts an identical strategy for all its clients moving in and out of the major currencies - typically the yen, Canadian and US dollars, the euro, Swiss francs and sterling.

ECU's main aim is to search out currencies that look set to fall against sterling in a short space of time - typically several weeks. Low interest rates on these foreign currencies is never the primary motivation for switching debt.

But given that interest rates on sterling remain relatively high, the lower interest rates on foreign currencies can be a valuable added bonus. Following the recent quarter-point cut in UK interest rates, 7-day sterling interbank borrowing rates are 4.5 per cent. But dollar rates are just over 3.5 per cent, euros 2 per cent, Swiss francs 0.75 per cent and the Japanese yen a measly 0.05 per cent.

ECU tends to take big bets on currencies - momentarily moving all or most of its clients' mortgage debts into those currencies most tipped for a fall against sterling. Its decisions are made by a team of experts comprising former senior economists and chief currency strategists from a number of investment banks.

Following a decent decline in both Canadian dollars and the euro, ECU has just moved all its clients' debt back into sterling. Typically ECU makes around 10 such currency switches a year.

But the company is quick to point out the risks on a foreign currency mortgage strategy.

During the exchange rate mechanism crisis in 1994, ECU's foreign currency mortgage customers momentarily saw their debt rise 45 per cent in sterling terms as the pound plummeted (although taking into account lower interest rates on foreign currencies at the time the effective decline was a more bearable 38 per cent).

ECU has comfortably made up for these losses since then but the episode highlights the potential risk of foreign currency mortgages. The company now often uses "stop loss" mechanisms that automatically move borrowers back into sterling if foreign currencies become particularly volatile.

"We have a safety first approach," says Cormac Naughten, head of private clients at ECU.

"After September 11 we went back into sterling to see how things settled down.

"At some stage every year there is a fluctuation of around 5 per cent in the wrong direction. That is a typical fluctuation," he says. "But as a borrower you've got to be able to withstand fluctuations of at least 10 per cent and maybe even 15 per cent."

Like many of ECU's clients, Paul James has therefore been building up separate cash savings as a cushion, partly funded by the savings made on the lower interest rates on foreign currencies. "Over the last couple of years not a lot has happened to my mortgage. But over the last seven weeks the debt has gone down by about £7,000. That's how it tends to happen. It's quiet for ages and then you get a major move," he says.

But he says foreign currency mortgages are not for people who are going to fret about each tiny move in currency prices.

"I'm always addicted to page 241 on Ceefax [where currency prices are listed] just after a switch," he says. "If we've had a currency swap I'll watch it for 7 or 10 days and then I tend to forget about it. I've put it all in their hands and so far - touch wood - they've tended to be right."