One borrower took a gamble and saves £30,000 on his mortgage portfolio. But there are safer ways to follow suit. By Clare Francis

Bill Oversby, 51, is one of a growing band of borrowers willing to take the risk of a foreign-currency mortgage in a bid to reduce the value of his debts.

The professional landlord, who owns nine properties in southwest London, has seen the value of his debt fall by £30,000 in just five months because he uses a debt manager, ECU Group.

Debt managers aim to shift your mortgage into currencies that are expected to weaken against sterling so that the value of your debt, when converted back from the foreign currency, goes down. Your repayments are also likely to be lower.
This practice is highly risky, however, and you are likely to see big fluctuations in the value of your debt. Oversby's debt has fallen by as much as £10,000 in a single day.

You do not have to take big risks, though, to get some of the benefits of foreign-currency mortgages. Last week, John Charcol, a broker, launched a mortgage that will track lower Swiss interest rates for five years - with no currency risk. The rate is just 3.99%.

Here, we offer a guide to foreign-currency mortgages - with and without currency risk.

What are my options if I don't want any currency risk?
A number of mortgages enable you to take advantage of lower interest rates in other countries without any currency risk - the loans are denominated in sterling and simply track foreign rates, usually for five to ten years. Ray Boulger at John Charcol warned: "These deals are not suitable if you want fixed repayments or a short-term loan."

Such mortgages usually track the London Interbank Offered Rate (Libor), the interest rate offered by a group of London banks on sterling and foreign currencies.

For example, Charcol's Swiss-franc mortgage, backed by Derbyshire building society, tracks the three-month Swiss Libor rate, currently 0.76%, plus 3.23 points for home purchases, or 3.49 points if you are a buy-to-let investor, giving rates of 3.99% and 4.25% respectively.

There is such a large premium because there is no currency risk. However, the deal is still competitive compared with mortgages that track UK rates. The best lifetime tracker, from Clydesdale bank, is 0.19 points above base rate, or 4.69%, while the best five-year deal, from Northern Rock, costs 4.74%.

The best lifetime buy-to-let deal is from GMAC at 0.74 points above base, or 5.24%. Derbyshire also offers a euro mortgage. The version for home purchases is 2.17 points above the three-month euro Libor rate, currently 2.14%, giving a rate of 4.31%. Buy-to-let borrowers pay an extra 2.37 points, or 4.51%.

You should also consider what may happen to interest rates in future. The majority of economists think the Bank of England will cut base rate by another quarter point before the spring. If so, the Clydesdale tracker would go down to 4.44% - still above the Swiss franc and euro mortgages.

Boulger thinks that Swiss rates are likely to remain stable for the foreseeable future, while eurozone rates could fall, making the euro loan even more attractive. Last week, the International Monetary Fund cut its forecasts for eurozone growth and said that the European Central Bank should consider cutting rates.

 

US rates went up this week. Where does that leave dollar mortgages?

The Federal Reserve, the American central bank, last week raised interest rates by a quarter point for its eleventh successive meeting, to 3.75%.

 

Against this rate, Charcol’s dollar mortgage looks good value — but there could be a sting in the tail because US rates are expected to go up further. The Charcol deal, backed by Leeds building society, has a fixed rate of 3.49% until the end of June 2006. It is then 0.4 points above the three-month US Libor rate until January 2016. Based on the current Libor rate of 3.92%, your rate would jump to 4.32% in the new year.

 

And US rates could go even higher. The Federal Reserve indicated last week that it would push through further “measured” increases because it is worried about inflation.

 

What are my options if I am happy to take a risk?

You can get even lower rates if you are prepared to shoulder the currency risk. Banks will charge a smaller premium above Libor, and there is also a chance that exchange rates will move in your favour and cut the value of your debt. Foreign-currency mortgages are not available from mainstream lenders, but you can get them from private investment banks such as Kleinwort Benson and Singer & Friedlander, or through brokers that specialise in wealthy clients, such as Savills Private Finance.

 

Mike Boles of Savills Private Finance said that rates from private banks are usually between 1 and 1.5 points above the relevant Libor rate. So you would pay about 2% for a loan in Swiss francs, about 3.5% in euros and about 4% in dollars.

 

The minimum loan size is usually about £400,000. Most lenders require you to have a bigger equity stake in the property than with standard sterling mortgages because of the risk that your debt will fluctuate in line with exchange rates. They will typically lend only 65% to 70% of the property value.

 

Boles said: “Interest in foreign-currency loans is growing. It spiked last year when rates in Britain were rising and the difference between UK and foreign rates widened. Even now, when rates appear to have peaked in Britain, borrowers are still interested in foreign loans because rates are lower elsewhere.”

 

However, brokers warn that many people underestimate the currency risk. Say you take out a £1m mortgage in US dollars. With an exchange rate of $1.8 to the pound, you would have a loan of $1.8m. If the American currency weakened by 10% against sterling, your dollar debt would be $1.62m, or £900,000 — so you would have cut £100,000 off your mortgage.

 

But if the dollar appreciated by 10% against sterling, your dollar debt would be $1.98m, or £1,100,000 — so the value of your mortgage would have increased by £100,000.

 

Cormac Naughten at ECU Group said: “Many people go for a foreign-currency mortgage for the low interest rate, but without realising that they have also made a large bet on the future value of sterling.”

 

How do I pick the right currency?

If you do not want to bet on just one currency, advisers recommend you take out a multi-currency loan.

 

Alternatively, if you do not want to make the currency bets yourself, you could hand over the management of your debt to a company such as ECU Group. Naughten said: “Our aim is to reduce the value of clients’ debts by switching into currencies that we feel will weaken. But this is not for the man on the street. If we get the currency direction wrong, the size of your loan could increase.” ECU Group requires clients to have an annual income of at least £100,000 and the minimum loan it will manage is £250,000. The loan must also be worth no more than 65% of the property’s value.

 

Loan repayments are made on an interest-only basis, so you should also set money aside to repay the capital if ECU does not reduce your debt. Any profits from its currency trades are not used to reduce your repayments; they are taken off the value of your loan at the end of the term.

 

Over the past 10 years, ECU has reduced clients’ loans by 46.5% before charges. However, past performance is no guide to the future.

 

There is a maximum annual charge of 1%, although this is smaller for bigger loans. ECU also takes a performance fee — if it gets the currency calls right, it will take 20% of any net profit.

 

Naughten said: “You have to take a three or five-year view and really hold your nerve.”

timesonline.co.uk