The following extracts from the article below
relate to ECU. Readers should note ECU's opinion that its managed currency mortgage programme is medium- to high-risk and that borrowers must be able to withstand a 15-20% increase in the size of their loan.
Play the forex market to gamble on debt
UK base interest rates may be falling, but mortgage lenders seem keen to keep the lower borrowing costs to themselves, writes Sharlene Goff.
While most lenders diligently passed on the recent base rate cut to existing customers on their standard variable rates, fewer have reflected the lower rate in their new mortgage offers.
A number of lenders – including Nationwide, Alliance & Leicester and Woolwich – have raised the rates on new tracker mortgages over the past couple of weeks, seemingly to offset in advance the impact of another base rate cut. Fixed mortgage rates are also still looking fairly high.
So more sophisticated borrowers may now feel it is time to go in search of lower rates overseas. Multi-currency mortgages offer exposure to lower interest rates and intend to reduce debt by moving into currencies that weaken against the pound.
This market has been dominated in recent years by ECU, the Mayfair-based currency manager. ECU actively manages debt by converting it into other currencies.
Multi-currency mortgages also present an opportunity for buy-to-let property investors who are no longer seeing much capital growth. By using a multi-currency manager they could – if all went well – payoff their mortgage faster and turn their debt into equity.
ECU had a mixed year last year but ended up 11 per cent down. This meant its clients saw their debt increase by 11 per cent.
Cormac Naughten at ECU says sterling has had its hardest time for 15 years. It has fallen sharply against other major currencies in recent weeks.
Jonathan Cornell, managing director of Hamptons International Mortgages, says managing debt in this way is only really suitable for the financially astute.
"People have got to understand the risks of taking out this kind of mortgage," he says. "They are trying to reduce the interest paid and the amount of the loan but this is not guaranteed and they could lose money.'
ECU says lenders can return clients to sterling if their debt increases by 15 per cent.
Naughten adds that the recent turbulence in the currency markets shows how important it is for clients to take a long term view – of at least three to five years.
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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Other Important information
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