Non Standard Mortgages - Foreign Currency
Risks And Disadvantages Of Foreign Currency Mortgages
Foreign currency mortgages are rightly described as being
for risk-friendly speculators. As has already been mentioned,
foreign exchange markets can be extremely volatile at times.
Just as the value of Sterling can go up against the foreign
currency of your choice, so too can it go down. And down.
And down…
If the worst happens and Sterling crashes against the currency
in which your mortgage has been taken, or the loan currency
has a surge of strength, you can find your monthly repayments
rising rapidly, without any real limit to the exposure.
If Sterling fell by 10 percent on a £150,000 loan borrowed
in Euros at an interest rate of 5.5 percent, for instance,
you could end up paying as much as £100 extra each month,
due to the fact that the Sterling value of your loan has
risen by ten percent.
The more that you borrow, the greater your exposure to
the risk and the more you could end up having to pay if
the currency swings go against your favour. Given the relative
strength of Sterling at the moment, it would seem that this
risk is a fairly real one.
Most lenders will forward you an absolute maximum of 75
percent of the property value for a foreign currency mortgage.
While this protects them against fairly sizeable currency
swings and ensures that the repossession value of the property
in the loan currency will almost certainly be sufficient
to repay the debt, it doesn't really give you any protection.
Many foreign banks shy away from this type of lending,
as the thought of going through the English legal system
to repossess he house or recover their funds is enough to
deter many of them from offering this type of service. They
are also aware that many borrowers may not be fully aware
of the full effect that swings in the exchange rate can
have.
At the end of the day, there is the possibility to enjoy
success on the foreign exchange and lower monthly repayments
as a result of a reduced interest rate. But the bottom line
is, only consider taking out a foreign currency mortgage
if you are able and prepared to tolerate sizeable increases
in the size of your repayment and definitely get specialist
advice before going ahead with any transaction.
Finally, it should be remembered that the prevailing rate
of interest in a country does not always reflect the rate
at which mortgage lenders will offer their home loans. For
instance, although the rate of interest maintained by the
European Central Bank has been consistently lower than that
maintained by the Bank of England, the gap between the lending
rates in the UK and across the Euro zone has not been so
wide, thanks largely to the high level of competition in
the UK mortgage market.
