Foreign Currency Mortgages The Pros And Cons
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Foreign Currency Mortgages: Pros and Cons
Introduction
Most UK mortgage borrowers opt for traditional UK lenders when purchasing a home, often unaware of a viable alternative: foreign currency mortgages. While UK interest rates are relatively stable compared to the 1980s, they are still higher than those in the Eurozone, Switzerland, the US, and Japan.
What Are Foreign Currency Mortgages?
Foreign currency mortgages allow you to borrow in Euros, US dollars, Swiss Francs, or Yen instead of Sterling. This can mean taking advantage of lower interest rates available in other countries.
Current Interest Rates (as of Dec 9, 2005):
- Japanese Yen: 0.12%
- Switzerland: 1.03%
- Eurozone: 2.46%
- US Dollar: 4.48%
- Sterling: 4.64%
While borrowing from another country incurs a premium, significant savings are still possible if rates remain steady.
Why Aren't More People Choosing This Option?
Despite the potential savings, only 1% of UK mortgages are taken out in foreign currencies. Here are the risks involved:
Interest Rate Fluctuations
Interest rates can be unpredictable. Events like the 9/11 attacks can cause sudden changes. If rates in your chosen country rise, the advantage over a standard UK mortgage diminishes.
Exchange Rate Risks
Exchange rates pose the biggest risk. If Sterling strengthens against the foreign currency, you save money on repayments. However, if Sterling weakens, you could end up paying more than you borrowed. This gamble can significantly impact your finances.
Requirements and Alternatives
To secure a foreign currency mortgage, you'll need at least a 20% deposit, and robust cash flow is essential.
Less Risky Alternative
You can link your UK mortgage to an interest rate in another country. This avoids exchange rate risks, but you're still exposed to interest rate changes. Such mortgages typically have a longer lock-in period (e.g., five years) with higher redemption penalties. Swiss Franc mortgages are popular due to their stable rates, as are Eurozone-linked mortgages.
Conclusion
Choosing a mortgage, whether UK-based or foreign, is inherently a gamble requiring careful thought. Consulting a financial specialist can provide valuable insights. The potential savings are substantial, but it’s crucial to evaluate your risk tolerance.
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