Everyone knows that the sum you pay for your mortgage depends on the interest rate set by the Bank of England. If interest rates go up, so does the cost of lending and therefore the price of borrowing too. Which means you’ll from your bank or building society raising those monthly payments.

Because we borrow enormous amounts to purchase real estate property, even minute variations in the base interest rate (set by the Bank of England) can have a great effect on our monthly mortgage payments. It’s no wonder that the opportunity to relegate the interest rate at which we pay off our loan is an appealing ambition for any homeowner.

International Interest Rates

Interest rates vary from country – or monetary zone – to country. Habitually England has interest rates than are commonly observed in the Euro zone, American or Japan. Even today, when interest rates in the UK are historically low, – around 4.5% - they are still high when related internationally.

What is a foreign currency home mortgage?

Now, very few people realize that it is possible to take out a mortgage in a foreign currency – in, say, Japanese Yen or Euros. In so doing the borrower is charged at the interest rate of that currency. So it is possible for an British borrower purchasing a house in the UK to borrow in Euros and profit from the lower cost of borrowing in the Euro zone.

How It Works

You take out a home mortgage in a foreign currency (e.g., Euros, US dollars, Yen or Swiss Francs). The bank / mortgage lender you borrow from changes this money into sterling and fixes the debt against your house in the UK.

You pay the interest rate on the original foreign currency loan, i.e., you are purchasing at the interest rate of that country – which will hopefully stay much lower than good ole sterling.

The Merits

There are two chief virtues to borrowing in a foreign currency.

1. You can benefit from those lower interest rates. This could lead to weighty savings. For example if you borrowed in Yen the difference in interest rates could be as much as 4%, or if you went for Euros, up to 2%. On a typical mortgage the possible savings could run into hundreds of pounds per month.

2. In addition to any savings on interest payments you might take advantage of currency markets as well. For example: If you are borrowing in dollars and the pound rises in value against the dollar you’ll be able to purchase more dollars for your pounds making a foreign currency mortgage even cheaper.

What could possibly go wrong?

Ah well now... Much. Remember the old saying about how investments can go down as well as up? Well this pertains, perhaps even more so, to the currency market and to the interest rates of various financial zones.

1. Currency rates are terribly unstable. There is no guarantee that the currency that you have borrowed will remain the same in relation to sterling – it might go up but could go down. And that of course means that you lose cash.

2. The same thing is true of interest rates. If interest rates rose in the currency zone of your choice again you could see yourself paying more. And there is no protection against these rises. In fact the risks are such that less than 1% of mortgage borrowers have went down this route.

Other Challenges

There are other problems associated with borrowing in a foreign currency:

• Most lenders will offer a maximum of 75% of the loan – compared with 90% or even more in the UK. So you have to find a bigger downpayment to cover your home purchase.

• There are additional administration expenses which will cut into any savings made.

• Lower interest rates established by the central bank in an area don’t always mean lower borrowing rates. In fact, because of the enormous competition in borrowing in the UK and the aggregate of borrowing demanded to buy property, lending rates are not so different to those available in the Euro zone and other low interest currency zones.

Helpful Tips

If you are interested in foreign currency mortgages here are some suggestions to help reduce the risk:

• Remember that this is a high-risk strategy – you must be able to afford to take losses if things go poorly. The smug charmer I referred to worked in the City and was obviously rich – despite apparently possessing a small brain.

• Talk to a competent advisor before advancing ahead with any transaction.

• Preferably approach a UK lender that deals w q ith foreign currency mortgages. Not many do.

• In some countries (such as Germany) fixed rates over long periods (up to 20 years) are much more common than they are here – this kind of home mortgage could offer some protection against interest rate upward fluctuations.

• Look at ways of spreading out the risk. One possible option is multi-currency mortgages. Borrow portions of your mortgage from a number of interest rate zones and currencies – you may lose in one but you’re unlikely to lose in all.

Another possiblity is a multi-currency switching facility where you can switch out of a currency that is falling or away from an interest rate that is increasing. However this kind of arrangement is pricey to manage – broker commissions for each transaction will add up and if you use a management company there will be more fees. Running such an account yourself would require time, dedication and skills unusual in an amateur investor.

Enter the Euro Zone

You might be tempted to borrow in Euros in the belief that the UK will, ultimately, enter the Euro zone anyway.

At the moment, however, entry to the Euro zone seems more and more uncertain and it would be rash take risks based on this type of prediction.

Of course, some people are employed by multi-national companies who can pay salaries in Euros. For these people borrowing in Euros carries less risks - but it is still primary to take professional advice before doing so.

Summary

In conclusion, notwithstanding the potential savings, foreign currency home mortgages are not for the faint hearted.

Remember, you are borrowing a great sum when you get a home. Risking it all in the precarious waters of the international money market is a decision that should not be taken lightly.

Finally

Don't forget old Ma Mortgage Sorter's Golden Rule: Always get three quotes when buying any UK financial mortgage product.