In recent years a new type of mortgage product has entered the UK market – foreign currency mortgages. These mortgages are designed to help home owners save money on their home loan by saving on interest payments and reducing the balance through changes in the foreign currency markets.
The take-up rate of foreign currency mortgages has been relatively low in the UK. This is because, while the potential rewards are high, so are the risks. Foreign interest rates can go up as well as down, just as they do in the UK, and the currency markets are largely unpredictable.
Borrowers may be tempted to take out mortgages in a foreign denomination for a UK property because the particular country that issues the loan has a lower interest rate. For example, the prevailing interest rate in the UK may be, say 5.25%, whilst in Japan the rate could be less than 1%. Borrowers may be fooled into believing that by simply taking out a mortgage in Yen they will automatically save money.
In simple terms, this is true. However the situation is far more complicated than that. If it wasn’t, we would probably all buy our homes with Japanese mortgages. There are two extra risks involved in securing foreign currency mortgages on UK properties.
The first is that while the UK interest rate is historically higher than the Japanese rate, this situation could potentially reverse in the future and you could end up paying a higher rate for a Japanese mortgage than if you simply acquired your property with a UK home loan. It is difficult to predict the long term patterns of interest rates in foreign countries, as well as the UK, so holding a mortgage in Yen carries the same interest rate risk as having a home loan in sterling.
The second risk – and the biggest - lies with foreign currency exchange rates. If you borrow in yen, you must repay in yen, and if you live and work in the UK it is likely you’re your earnings are in sterling. This means that in order to make payments on your yen mortgage, you must first convert your sterling to yen - exposing you to the fluctuations of the foreign currency market.
If the sterling strengthened against the yen, then you would need to convert less sterling in order to pay back your yen mortgage. That would be ideal as you would actually pay back less than you borrowed. However, if the value of the sterling fell against the yen, you would need to pay back more capital than you borrowed. This means that the outstanding balance of your home loan can increase with fluctuations in the foreign currency markets, as well as decrease.
Care must be taken and all risks properly assessed before taking out a foreign currency mortgage. If you are considering doing so you should speak to an independent mortgage broker who specialises in these types of mortgages. It may be wiser to secure a sterling mortgage against a UK property to eliminate the risks involved with the currency markets.
