yen mortgages, foreign-currency mortgages

Risky ways to save on your mortgage

15.09.2006

by Jody Clarke

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Update: read Should you buy a yen mortgage? for more expert advice on yen and foreign currency mortgages.

Interest rates aren’t likely to stay at 4.75% for long now that inflation has unexpectedly jumped up again. The consumer price index rose to 2.5% in August from 2.4% in July, well ahead of the Bank of England’s annual target of 2%. But while any rise is likely to hit many mortgage holders on variable rates quite severely, it doesn’t necessarily mean that you can’t continue to find low rates. Foreign-currency mortgages have been available on the UK market for some time, and although quite risky in comparison to their domestic counterparts, taking one out could save you a bucket-load of cash. The only problem is that you’ll have to be filthy rich first.

Foreign-currency mortgages: impressive savings

Borrowing in sterling is more expensive than borrowing in Swiss francs or at the Euro libor rate, which makes borrowing at other zones’ rates an obvious attraction. ECU, a company that manages foreign-currency mortgages
for its clients, says the average interest it has obtained for its customers – plus a margin of 1.75% over the past five years – is 3.43%, against a UK interest rate of 6.14%. That’s an impressive saving. Another advantage is that by borrowing in a foreign currency but owning an asset in sterling, if currency movements move in your favour the value of your debt could fall.

Foreign-currency mortgages: the consequences

However, if prices move in the opposite direction, you could see all the equity in your home disappear, and end up burning your fingers badly. “Ultimately, it’s mainly bankers or finance guys” that tend to take out these kinds of mortgages, “because they tend to understand the risks”, says Jonathan Cornell of Hamptons International Mortgages. But that’s probably a good thing, he believes. In the early 1990s, many people took out yen mortgages to take advantage of low rates in Japan, but were then hurt by a strengthening yen. “The trouble was, when someone isn’t so astute, they don’t realise what the consequences are if it doesn’t do what it’s supposed to,” Cornell says.

Foreign-currency mortgages: only the rich need apply

High net-worth individuals can sidetrack the problems posed by currency fluctuations by “flipping” the currencies in which they get paid from month to month. However, if they are earning such a high salary, they are probably a member of one of the private banks offering mortgages in other denominations already. Take, for example, Fortis Bank; it offers a yen mortgage at 0.35% and a Swiss Franc mortgage at 1.52%, with a maximum advance of 70%. Jaw-dropping rates, yes, but the message seems to be that first-time buyers and charity cases need not apply.