Even though UK interest rates are low compared to the rest of the world, they are still much higher than in the Eurozone, the US, Switzerland, and even Japan. So, you can now borrow the money you need in Euros, US dollars, Swiss francs, or yen, put your house up as collateral, and pay a much lower interest rate.
The following three-month money market interest rates show how far ahead of the rest of the world UK interest rates are:
Sterling (GBP) GBP 4.64
US $ 4.48 percent
Eurozone 2.46 percent
03 percent Switzerland
Japanese Yen 0.12 percent
(Source: Money Market Rates for 3 Months, Financial Times, December 9, 2005)
But don't try to get a mortgage loan at these 3 month Money market rates. If you want to borrow in a foreign currency, you will have to pay more. But even if interest rates stayed the same, there would still be a lot of money to save on interest rates.
So why do less than 1% of UK mortgages get paid for in foreign currencies? The answer is that there are more dangers.
Rates could go against what has happened in the past and close the gap between rates based on sterling and rates for the currency in which the mortgage was borrowed. This would cut down on the interest rate savings and could even make the interest rate more expensive than a standard GBPsterling mortgage at some point.
But changes in exchange rates are by far the biggest risk. If you took out a loan in, say, Yen, you will have to pay it back in Yen. That would be fine if the exchange rates for Yen and Sterling stayed the same, but they don't.
If the value of the pound rose against the yen, you would have to change less pound into yen to pay back the loan than the value of the pound you borrowed. That would be great if you could save money on your interest rate and pay back less than you borrowed. But if the value of the pound fell against the yen, you would end up paying back more money than you borrowed. So, in this situation, an overseas mortgage is a bet on the value of the pound against the currency you borrowed. In other words, you have turned your mortgage, which is likely your biggest personal debt, into a bet on the value of one currency over another. And made sure your home was safe from it! You might win, but it's not for people who are easily scared.
If you want to get a foreign currency mortgage, you should also know that you'll need a down payment of at least 20% on the house you want to buy.
There is now a second choice, by the way. You can get a mortgage in GBPsterling with an interest rate that is tied to an interest rate in another country. Even though you don't have to worry about currency risk, you are still betting that the overseas interest rate plus the interest rate premium you have to pay will be lower than the interest rates in the UK. Most of the time, these kinds of mortgages lock you in for 5 years. So, if you want to pay it off early, you'll have to pay a big fee. However, you can usually move the mortgage to another property. Some people are willing to take that risk, especially if their mortgage is tied to the interest rate on the Swiss Franc, which has been amazingly low and stable over the past few years. For instance, interest rates in Switzerland haven't gone above 1% in the last 4 years, and rates in the Eurozone haven't changed in the last 5 years.
Still, I think of part of the language for a regulated investment warning.
... past performance shouldn't be taken as a sign of what will happen in the future.
You pay your money and you take your chance.
