Foreign Currency Mortgages – The Pros And Cons

When it comes to securing a mortgage, most people in the UK opt for traditional lenders. However, there’s an alternative that’s worth considering: foreign currency mortgages. This approach can offer substantial savings, but it comes with its own set of risks and considerations. Here’s a breakdown:

### Understanding Foreign Currency Mortgages

1. What is a Foreign Currency Mortgage?

Instead of borrowing in British Pounds (Sterling), you can take out a mortgage in another currency such as Euros, US Dollars, Swiss Francs, or Japanese Yen. This can be appealing because interest rates in these currencies are often lower than in the UK.

2. Comparative Interest Rates

Here’s a snapshot of 3-month money market interest rates as of December 2005:

- Japanese Yen: 0.12%

- Switzerland: 1.03%

- Eurozone: 2.46%

- US Dollars: 4.48%

- Sterling: 4.64%

As shown, Sterling rates are relatively high compared to these currencies. Even though borrowing in foreign currencies could offer lower interest rates, the actual savings might be mitigated by premiums and other costs.

3. Risks Involved

- Interest Rate Fluctuations: While foreign interest rates may be lower, they can be unpredictable. Unexpected changes in interest rates in the country of the borrowed currency could negate the initial savings.

- Exchange Rate Risks: This is a major risk. If you borrow in Euros, for example, you need to repay in Euros. Exchange rate movements between the Euro and Sterling can significantly impact the amount you ultimately pay. If Sterling strengthens against the Euro, you’ll need fewer pounds to repay your loan, which is beneficial. Conversely, if Sterling weakens, you’ll end up paying more.

4. Alternatives

If the currency risk seems too daunting, consider linking your UK mortgage to interest rates in another country. This option reduces exposure to exchange rate fluctuations but still allows you to benefit from lower foreign interest rates. Typically, this type of mortgage comes with longer commitment periods and higher redemption penalties, but it provides some flexibility, such as the ability to transfer the mortgage to another property.

### Conclusion

Foreign currency mortgages can potentially offer savings, particularly if the interest rates in the borrowed currency are lower and exchange rates are favourable. However, they also come with significant risks related to currency fluctuations and interest rate changes. If you’re considering this option, it's crucial to thoroughly evaluate your financial situation and consult with a financial specialist to ensure it aligns with your risk tolerance and financial goals.