Almost all mortgage borrowers go with a mainstream UK lender to make the biggest purchase of their lives. It's the norm, and to be honest, most people don't know there's an alternative: the foreign currency mortgage.
Interest rates in the UK are pretty good right now, especially compared to the 1980s. However, they are much higher here than in the Eurozone, Switzerland, the United States, or Japan.
Did you know that instead of Sterling, you can borrow the money you need to buy a house in Euros, US dollars, Swiss francs, or Yen? This means you could take advantage of lower interest rates elsewhere by putting your house up as collateral for a loan.
You can compare the UK's interest rates with those of other countries by looking at these 3 month money market interest rates:
Japanese Yen 0.12 percent
Switzerland 1.03 percent
Eurozone 2.46 percent
US $ 4.48 percent
Sterling (GBP) GBP 4.64
(Source: Money Market Rates for 3 Months, Financial Times, December 9, 2005)
As you can see, the value of Sterling is much higher than that of some of the others. You'll lose some of that benefit, though, because you'll have to pay more to borrow money from another country. Still, if interest rates stay the way they are now, there are still a lot of ways to save money.
You might be wondering, if the savings are so good, why only 1% of mortgages in the UK are taken out in foreign currencies. There are, however, other things to think about.
Interest rates can be hard to predict, and even though they have been stable for years, something like the 9/11 attacks could change them. If interest rates went up in the country you borrowed from, you would lose a lot of the benefits of a foreign currency mortgage over a regular UK mortgage.
Exchange rates are the most risky area because they are the least predictable. For example, if you took out a loan in Euros, you have to pay it back in Euros. If the Euro/Sterling exchange rates were linked and went up and down at the same rate, it wouldn't be a problem, but that's not the case.
If the value of the pound rose against the euro, you would be ahead. You would save a lot of money because you wouldn't have to change as much Sterling into Euros to pay back the loan. That's the kind of situation that makes a mortgage in a foreign currency so appealing.
But if the value of the pound falls against the euro, you will lose money and have to pay back more than you borrowed. It's a big risk, and your home is on the line. Your home will depend on the exchange rates, which means you could make or lose a lot of money.
To get a foreign currency mortgage, you will need at least a 20% down payment on the house you want to buy. This means you will need a good cash flow to make this happen.
There is another option that is less risky than the ones above. You can link your mortgage in the UK to the interest rate in another country. This means that you are not taking a chance on the exchange rate, but you will still have to pay the interest rate, hoping that it will never be higher than the UK interest rate. There is less risk, but these mortgages lock you in for a longer time, like 5 years, and the penalties for getting out of them will be more than small. There is some flexibility, though. If you want to pay off the loan early, you can often move the mortgage to another property.
The option above is especially popular for mortgages tied to the Swiss Franc interest rate, whose rates have been below 1 percent for the last four years. The interest rate in the Eurozone is also very steady; it hasn't changed in five years.
No matter what you decide, and even if you have a UK mortgage, it's a gamble that you should think a lot about. It might be a good idea to talk to a financial expert about it. You can save a lot of money, but do you have the guts to do it?
