The vast majority of mortgage borrowers get their mortgage from
a mainstream UK lender, paying in pounds sterling and following
the Bank of England base interest rate. But there are
alternatives...
The UK's domestic interest rates are quite low, especially in
comparison with recent years, however interest rates are in fact
a lot lower in the Eurozone, Switzerland, America and Japan. You
have the option of borrowing the money you need for your house
purchase in Euros, US dollars, Swiss Francs or Yen, securing the
debt on your house and taking advantage of the lower interest
rates.
This illustration of 3 month money market interest rates
demonstrate the differences between UK interest rates and those
around the world:
Japanese Yen 0.12% Switzerland 1.03% Eurozone 2.46% US $
4.48% Sterling £ 4.64%
(Source: 3 month Money Market Rates, Financial Times, 9/12/05)
You won't get as good a deal as the money market rates
illustrated suggest, because you will have to pay a premium for
borrowing in an overseas currency - however, if interest rates
stay as they are now, the potential is still there to make huge
interest rate savings.
So if the rates are so good, why are only 1% of UK householder
mortgages taken out in overseas currencies? The reason is: there
are extra risks.
Interest rates - they could go against historical trends and
increase, narrowing the gap between UK rates and the rates for
the overseas currency in which the mortgage was taken out. This
would mean a reduced saving in interest and it could even turn
your saving into a deficit, and cost even more than a standard
UK mortgage.
Exchange rates - the biggest risk lies here. If you have
borrowed in Swiss Francs for example, you have to repay the loan
in Swiss Francs. If the Swiss Franc/Sterling exchange rates
could be frozen together then it wouldn't be a problem, but of
course that's never going to happen.
If Sterling strengthened against the Swiss Franc, then your risk
has paid off. You would have to convert less Sterling back into
Swiss Francs to repay the loan than the Sterling value of the
capital you borrowed in the first place. An interest rate saving
and pay back less than you borrowed, that's the ideal scenario.
But if Sterling falls against the Swiss Franc you get the
worst-case scenario, and you will end up repaying more money
than you borrowed. So in this context, you'll be taking out an
overseas mortgage rests on the hope that Sterling will not fall
against the currency you borrowed. Essentially, you will have
converted your mortgage into a currency speculation, securing
your most expensive possession, your home, against it! There's
big savings to be made - but it's a big gamble.
You will also need to provide a lot of cash up front, to get a
foreign currency mortgage you will need a deposit of at least
20% for your house purchase.
There is another way. You can link your pounds sterling mortgage
to a foreign interest rate. You'll avoid the exchange rate
gamble, but you will still be gambling on the assumption that
overseas interest rates will stay at a lower rate than the UK's
domestic interest rates. These types of mortgage typically tie
you in for 5 years, and if you want to pay it off early or
switch mortgages, you will have to pay a large penalty. However,
the mortgage can often be transferred to another property. Some
people find this type of mortgage represents an acceptable risk,
especially if the mortgage is linked to the Swiss Franc interest
rate. Interest rates in Switzerland have remained below 1% for
the last four years. Similarly, the Eurozone interest rate has
not moved in five years.
Whatever you decide, it's always a gamble, and you must think
long and hard before making a decision, ideally seeking
independent financial advice. In the long run, it's you who will
either be the winner, or the loser.
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