ECU Group targets borrowings above £100,000 for mortgage reduction service
A residential mortgage reduction management service has been launched aimed at borrowings above £100,000. Robert Stock investigates.
The service, which provides commission to intermediaries, is offered by ED&F Man subsidiary the ECU Group. It works by switching the debt between currencies to take advantage of currency fluctuations and interest late differentials.
This does introduce an element of risk. If, for example, the debt is switched into yen and yen strengthens against sterling, capital outstanding on the debt increases. If it weakens, the capital value of the debt falls.
To illustrate the potential of playing interest rate differentials, the group gives the example of a £1m loan which, in sterling, carries an inter-bank interest rate of 5% but in yen carries just 0.25%, reducing monthly interest from £5,208.33 to £1,250.
Debt at the group is pooled and managed by a team headed by Michael Petley, Chief executive of the ECU Group and chairman of its investment committee, which employs stop loss techniques should currency markets move against its positions,
Because of the risk, Stephen Cooper, marketing manager at the ECU Group, screens debtholders for suitability requiring income of at least £75,000 per annum and requires a maximum load-to-debt ratio of 65%.
Cooper said that in an asset deflationary environment debt reduction is important as the ratio of asset value to debt value is harder to reduce.
The group charges an annual fee ranging from 0.25% on loans of £lm and above, down to 1% on loans of £150,000 to £250,000.
It also takes a 15% performance fee on the aggregate debt reduction and net interest rate savings during its management period, net of its other charges. It will negotiate special rates with key partners and will white label its services.
The service works by moving a borrower's mortgage to one of the ECU Group's partner private banks as an interest-only mortgage. The group manages the debt while the borrower makes interest payments at a level depending on the currency that the debt is held in.
Cooper said in the period 1 November 1988 to 31 December 2001, the Group's track record showed the capital on a £100,000 mortgage would have been reduced to £63,640, while the annual interest rate burden was reduced from a sterling based rate of 9.83% to 6.06%.
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.
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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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A residential mortgage reduction management service has been launched aimed at borrowings above £100,000. Robert Stock investigates.
