ECU IN THE MEDIA
Money Extra - September 2005
Foreign Currency Mortgages for Financial Sophisticates
Foreign Currency Mortgages for Financial Sophisticates
Foreign currency mortgages might sound attractive with their low interest rates but the reality is somewhat different. Karen Murray explains.
Foreign currency mortgages are for speculators and those who are financially sophisticated. Usually you have to put down a large deposit often around 35% of the value of the property and the minimum loan is around £250,000. You have to be a higher earner as well, topping £100,000 a year. Cormac Naughten of currency mortgage specialist ECU Group says that mortgages in currencies such as Yen, Euros and Swiss Francs are private banking products reserved for the wealthy, City financiers and entrepreneurs.
Normally you take out your loan in one currency at a time and, as Mr Naughten explained, you would switch currencies around 10 times a year. Of course, there are charges for doing this of between £100 to £150 for each switch. On top of this, there's a 1% annual management charge plus 20% of the net profit would go to ECU. Even so, over the last 10 years ECU said that on average clients have seen their outstanding mortgage balance fall by 46.5%.
For example, if a £1m loan was converted into US dollars at an exchange rate of 1.80, it would create a $1.8m loan. If the pound moved to $2, when the loan is converted back into sterling it's shrunk to £900,000. As long as the loan is on a main residence, there's no capital gains to pay on the sale and it adds up to quite a killing.
However, for most of us, it's not worth the gamble. Even if you get a Euro interest rate of around say 3.5% by the time you add in the commission fees for currency exchanges, usually around £20 a transaction, and other fees, the real rate is 4% plus, which you can get in sterling, and on top of it all you've got a currency risk.
Track overseas Interest rates instead?
Foreign currency loans rarely make an appearance on the high street. Skipton Building Society introduced a four-year Stateside tracker which was set at 2% above the US dollar Libor rate (that is the London Inter-bank Offered Rate otherwise known as the interest rate the banks charge each other). Libor-tracking mortgages are an alternative to tracking the Bank of England's base rate and are offered because they can be cheaper. The Stateside was withdrawn recently following steady increases in interest rates by the US Federal Reserve.
With these types of trackers, the advantage is there is no currency risk because the mortgage is in sterling and basically, all you are doing is betting that US interest rates stay lower than UK rates.
More recently, Scarborough Building Society brought out a buy-to-let mortgage that tracks the US-Libor rate until December 2008. The initial interest rate until the end of this year is 3.49% and then it tracks the US$ three-month Libor (3.53%) plus 1.15% until December 2008. Scarborough said that even though US interest rates have risen, the mortgage interest rate offered is still lower than UK rates but in the longer-term it would have to remain that way.
West Bromwich Building Society has a similar buy-to-let product that tracks the Euribor rate (2.13%) (Euro Interbank Offer Rate) plus 2.1% until November 2007, giving a current interest mortgage rate of 4.23%.
Both are specialist mortgages for the financial savvy and are unlikely to go mainstream. But you can see why they look attract. Our Libor rate is 4.5%, the Euribor rate is 2.13% and the US-Libor is 3.53%.
In most cases, the most common reason for having a foreign currency mortgage is if you are buying overseas. Usually, it's cheaper to take out a loan in the currency of the country and, if you are paid in that country or receive rental income, it is certainly cheaper. Assetz, a buy-to-let property search and finance company, is currently offering a Swiss Franc mortgage in Cyprus with an interest rate of 3.25%.
However, if you want something you feel comfortable with, many of the well-known high street banks such as Barclays, Woolwich, NatWest, HSBC, Scottish Widows and Halifax offer Euro currency loans. Halifax through its Spanish arm Banco Halifax Hispania (www.halifax.es) offers a Euribor-linked mortgage with an APR of around 3.31%. The interest rate on the mortgage is set at 1% higher than the Euribor rate but you need a 40% deposit. The good thing about dealing with a British operation is that all documents are in English and Banco Halifax has an English-speaking telephone service.
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