Intrepid homeowners are saving themselves thousands by switching their homeloans to

dollars, euros and other currencies. But exchange rate fluctuations can play havoc with your financial planning, warns Alison Steed.

A yen to save money on the mortgage

The Bank of England kept rates on hold this week, which means there is no more pain for mortgage holders just yet, but no respite either. About 250,000 borrowers due to move off a two-year fixed rate mortgage between October and December according to Nationwide, and are likely to see a sharp increase in their monthly mortgage payments. Finding a cheaper alternative is increasingly difficult. But for those prepared to shoulder additional risk, a multi-currency mortgage could be an option. Some homeowners have saved thousands of pounds in interest payments by switching to a home loan in dollars, euros or Japanese yen.

A multi-currency mortgage could save you money, but only if the currency markets move in your favour. And this is a big “if”. The reverse could also happen and such deals could end up costing significantly more than a standard fixed or discounted rate.

These products can be relatively complex, so it is important that you understand the terms and conditions before signing on the dotted line. Most companies offering this facility – including Savills Private Finance, HSBC Private Bank, Investec Bank, Kaupthing Singer & Friedlander, Citigroup and ECU Mortgages – will lend only to those with mortgages of £250,000 plus.

The main advantage of having your mortgage lodged in a different currency is that if the exchange rate works in your favour, the amount you owe decreases. But the interest rates can also be lower. For example, the base rate in Japan at the moment is 0.5 per cent, in Switzerland it is 4 per cent, in Canada it is 4.5 per cent and in America it is 5.25 per cent. So you would be able to make a significant saving on any loan you have in yen compared with the UK’s Bank of England base rate of 5.75 per cent.

Melanie Bien, a director of Savills Private Finance, says: “Our international division can arrange multi-currency lending – in euros, US dollars or even yen – against your UK home. This can mean a lower rate of interest than you would get with sterling. “Alternatively, you could opt for a managed multi-currency mortgage, where a manager moves your loan in and out of various currencies when he judges that it is prudent to do so.”

At present the pound is worth around $2, so if you have your mortgage in sterling and transfer it to dollars, and the dollar weakens further, you would have automatically reduced the size of you home loan.

So if your mortgage is £100,000 and you wanted to convert it to dollars, which were – to make the maths easier - $1.80 to the pound, your debt would be $180,000. However if the dollar weakened to, say $2 to £1, then you could convert the debt back into sterling and save $10,000, as the mortgage would now be £90,000. But while this is an appealing idea, it could easily work the other way. Bien explains, “If your home is worth £800,000 and you take out a £500,000 mortgage at the current exchange rate of €1.5 to the pound, the loan would be worth €750,000. This would giv e you £300,000 worth of equity in your home. But if the euro strengthened to €1.40 to the pound your debt would be £535,700 – and your equity would shrink to £264,300.”

While that is a sobering thought, there are people who are very happy with the performance of their multi-currency mortgage. Gareth Hamblin, 54, and his wife Marilyn, 55, have a multi-currency mortgage with ECU Mortgages, and have managed to reduce the loan by a whopping 24 per cent in just the past few years.

Hamblin, who works as a chief engineer on a cruise liner for Disney, is paid in dollars, and so has already got some experience of how currency risk can affect his bills in sterling. The couple live in Finstock, Oxfordshire, and now have a mortgage of around £255,000. Hamblin says: “If the mortgage is held in sterling, then you pay the Libor (London interbank borrowing rate) plus 1.75 percentage points. But that is the margin no matter what the currency. So at one stage we were in the yen, when the interest rate there was negative, so we were paying less than 1.75 per cent.”

The loan is switched between currencies on the couple’s behalf by ECU, even though the loan itself is with Kleinwort Benson. They pay their mortgage every three months to make it easier to handle. They are given a breakdown of which currencies it has been held in and for how long, and then the total amount they have to pay.

But each month they also pay ECU a management fee, which is 1 per cent of the loan value, says Hamblin. On top of that, if ECU makes the customer a net saving over the year, once management fees are taken into account, it will charge a performance fee of 20 per cent of this saving.

Cormac Naughten of ECU says: “If you had saved £100,000 and you had already paid management fees of £10,000, we would consider that to be a net saving of £90,000. So we would send you a bill for 20 per cent of that. But most lenders will allow you to add the amount you would pay us to the loan.”

Although that might sound like you are taking three steps forwards and two steps back, Naughten rightly points out that you have saved £72,000, which is no mean feat.

Apart from ECU’s charges, Hamblin also has to pay a £100 switching fee to Kleinwort Benson each time he moves currencies. Such fees are standard, although they can be structured differently. Rather than taking a flat fee of between £100 and £150, some banks charge a margin on the currency exchange, which will typically be in the region of 0.0165 per cent, says Naughten.

But despite the higher charges Hamblin remains happy with the mortgage and, more importantly, he is in pocket on the deal.

He says: “I would definitely recommend it to anyone prepared to take a long-term view. It is not for the faint-hearted, but it has about as much risk as many other investments.” He says he is confident he will continue to make money on the deal – but admits he doesn’t look at currency movements on a day-to-day basis. He’d rather let the managers worry about foreign exchange rate fluctuations and make the decisions.

Skipton building society previously launched a similar product, in association with Accord, the internet arm of Yorkshire building society. Its mortgage was denominated in sterling but tracked the US dollar Libor rate, which at the time was significantly lower than UK rates. But David Hollingworth of mortgage brokers London & Country says anyone still on this deal is now paying much more.

Bien adds: “Multi-currency options are growing in popularity but they only really suit sophisticated borrowers.” She adds: “A multi-currency mortgage is also a high-risk strategy: if your home is in the UK, you do not escape exchange rates completely as your home is still valued in sterling and exchange-rate movements can affect the amount of equity you have in the property.”

telegraph.co.uk