ECU IN THE MEDIA
The Sunday Times - April 2005
Foreign currency loans may come home to roost
Foreign currency loans may come home to roost
Canny homebuyers have been enjoying low US interest rates but experts warn there are big risks. By David Budworth
Britain's base rate is already the highest in the developed world, at 4.75%, and there could be another quarter-point rise to 5%, possibly next month.
Interest rates are much lower overseas. In the eurozone they have been 2% since June 2003, and in Japan they are 1.375%.
More British homeowners are therefore being tempted to borrow from abroad. But brokers warn this could be a mistake.
The most accessible foreign-exchange mortgages are those linked to American rates. You can even take out a dollar loan with high-street names such as Skipton building society.
The big advantage of most high-street deals is that the debt and repayments are in sterling, meaning you are not exposed to currency fluctuations.
But given the outlook for American rates, advisers suggest you steer clear. Since June 2004, the US Federal Reserve has announced seven quarter-point rises, taking rates from 1% to 2.75%. And the Fed has hinted that more increases are coming.
Even if US rates remain lower than those in Britain, you could still end up paying a higher rate than you would on a conventional UK loan.
Most deals track the London Interbank Offered Rate (Libor). This is the interest rate offered by a group of London banks for US dollar deposits. It follows the Fed rate, but is not identical.
The margin banks charge on top of Libor is often pretty hefty. Skipton's four-year Stateside tracker is pegged two points above Libor and reset every three months. The current rate of 4.92% is fixed until 1 June.
You can get cheaper British loans. Kent Reliance building society has a two-year discount deal at 4.55%. Even if the UK base rate went up by a quarter point, the pay rate would rise to 4.8% - still lower than Skipton's US deal.
You can get slightly cheaper dollar mortgages from private banks. Kleinwort Benson charges 4.35%. But because the debt and repayments are in dollars, these deals are riskier.
Mike Boles of FPD Savills, an adviser, said: "Unless you are earning money in an overseas currency we wouldn't normally recommend one of these deals."
If the dollar strengthens against the pound your repayments will rise in sterling terms. Someone who takes out a dollar mortgage with Kleinwort to cover a £500,000 loan at the current exchange rate of about $1.88 to the pound would owe about $940,000. The monthly repayment on a 20-year, interest-only loan would be about $3,400, or £1,800.
If the exchange rate strengthened to $1.70 to the pound, the monthly repayment would remain the same in dollar terms, but you would have to pay £2,000 a month. However, if the dollar weakened you would pay less.
The dollar has fallen by more than 30% against sterling over the past three years. Many experts think it will remain weak, but they disagree on whether it will plunge much further.
For borrowers who can stomach currency fluctuations, Boles recommends a multi- currency mortgage. These switch between a basket of currencies to take advantage of exchange-rate movements. The aim is to reduce the value of your debt more quickly than you normally would. They should also enable you to benefit from lower interest rates overseas.
Mark and Susan Nathan, from Windsor, have saved "massive amounts" of money using a multi-currency mortgage managed by the ECU Group.
However, Mark stresses that the scheme is not for everyone. He said: "You are taking a risk. You need enough equity in your home to withstand short-term currency swings, but the longer-term savings have been very significant."
timesonline.co.uk
Authorised and Regulated by the
Financial Services Authority © 2010 The ECU Group plc