Mortgages in a foreign currency – the whys and wherefores…

When I heard that you could take out a mortgage in Swiss francs to pay for a house in, say, Cyprus I was amazed. I had heard of Cypriot euro mortgages and of UK sterling mortgages…but a Swiss franc mortgage? In Cyprus? That was a new one on me!

Actually, there can be sound reasons behind this seemingly strange move. Mortgage interest rates in the UK or Cyprus are significantly higher than they are in Switzerland. You can borrow the money you need in Swiss francs, secure the debt against your house, and pay a much lower rate of interest. This applies to buying property and getting a mortgage in any country abroad.

This is all well and good, but you need to remember that there is a very good reason that not everybody does this – there are considerable risks involved – risks that people are not always made aware of.

You will own a property in Cyprus that is valued in euros, yet your mortgage is in Swiss francs, and you could be earning your income in pounds. If exchange rates move against you, you could well lose the benefit of the interest rate saving and end up owing more capital than at the outset of the mortgage.

Why? Well, you will lose out on some of your interest advantage because you will pay a premium to borrow currency from another country. True, if interest rates continued at the same rate as you borrowed at there are large savings to be made. But if interest rates increased, then you would lose a lot of the advantage gained between the foreign mortgage and the standard UK mortgage.

In these economically unpredictable times who knows what could happen? Interest rates in the EU and in Switzerland stayed stable for years but all bets are off today. Also, there is the gremlin that we know as Currency Exchange Rates. If you have travelled in the last year or so I am sure I don’t need to tell you that herein lies the most unpredictable area of risk.

Currency Exchange Rates change by the minute – sometimes quite considerably – and what you are paying for your mortgage in Swiss Francs one month may rise quite dramatically from one month to the other.

Because you borrowed in Swiss francs, the mortgage must be repaid in Swiss francs. If sterling strengthened against Swiss francs you’d literally be laughing all the way to the bank. Unfortunately this has not been the case of late…quite the opposite in fact.

Smart client Joy Wenman ruefully wrote to Charles: “Because we rely on sterling we were at first paying £1,700 sterling per quarter but now it is more like £2,500 sterling.” Quite a difference...

As Charles Purdy, director of Smart Currency Exchange, comments: “I did warn a number of clients at the time of taking out Swiss franc mortgages of the currency risk versus the interest rate benefit. Sadly I have been proved right over the years.”

Forewarned is Forearmed and it is as well to bear this in mind and to make sure that you cover yourself against any currency fluctuations.

Ms Wenman’s experience is a common one, but it need NOT have been the case. There is a way that you can ensure that the exchange rate doesn’t move against you: it is called ‘forward buying’.

When you ‘forward buy’ your currency, you are given a predetermined rate that will then remain unchanged for a predetermined time. This means that at least you will know exactly how much you are paying for the months ahead - you know the cost and don’t have to worry that it will increase.

The scenario that Ms Wenman experienced can be avoided, with the help of a little foresight and the assistance of a really good currency company.

All in all, this is not an easy decision and you need to consult the experts. A really good IFA (Independent Financial Advisor) and a relationship with a good currency exchange expert could well be worth their weight in gold! To be put in touch with recommended experts just call the OGC Resource Centre on 0207 898 0549, or call Smart Currency Exchange direct on 0207 898 0541 to discuss your currency options.

Kim Brown
http://www.overseasbuyingguide.com