FOREIGN CURRENCY MORTGAGES

Multi-currency mortgages are available as interest-only mortgages on UK properties. They aim to reduce the capital value of a debt in sterling, by taking advantage of exchange rate movements. They also offer potentially lower interest rates than those in the UK.

Over the past decade the cost of servicing loans in G10 currencies (other than sterling) have been up to 80% lower than the sterling equivalent.

Multi-currency mortgages are provided by a number of leading private banks. But, unless a client has very good knowledge of currency markets, it is strongly advised they should appoint a currency manager.

Multi-currency mortgages are definitely not for everyone and are probably best suited to financially sophisticated borrowers. Whether you are taking control of the currency management decisions yourself or the loan is under the charge of a specialist manager, borrowers can easily lose out if the foreign currencies move against them.

Clients should be able to withstand an increase in the level of their loans. Lending banks require the right to automatically convert a currency loan back into sterling if it increases by 15%, breaching what is known as a conversion limit.

Lending banks will have strict criteria for the clients they will accept. They normally must have a loan to value ratio of less than 65%. The minimum size loan starts normally at £250,000, but the average starting loan tends to be closer to £1,000,000.

Clients must earn more than £100,000 a year at a typical three times income multiple although some banks do not use strict income multiples and instead look at the client’s overall financial position and ability to service the loan.

But if you take this additional risk, the benefits of a managed currency mortgage can be substantial. With good management, performance figures show that almost 25% can be wiped off the value of clients loans through currency switching, with the figures rising to as much as 40% if you also include the interest rate saving.

Since 1988, the combined benefits of the programme have allowed some borrowers to pay off in full, loans taken out in the late 1980s.

Buying this sort of mortgage is a risk, and is a bit like investing in the stock market. Clients should be prepared for the long term. It may suit clients with a more adventurous outlook. It is definitely not for those with a cautious or low risk outlook and with modest assets.