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Foreign Currency Mortgages – What Are They And What Are The Risks? By Michael Challiner
99.9% of mortgage borrowers raise the money they need to buy their home in pounds sterling and pay the prevailing UK based interest rate. But it does not have to be that way…….. Whilst by its' own historical standards, the UK's domestic interest rates are low, they are still significantly higher than in the Eurozone, America, Switzerland and indeed, Japan. Therefore, you can currently borrow the money you need in Euros, $ dollars, Swiss Francs or Yen, secure the debt against your house in the UK and pay a much lower rate of interest. The following 3 month money market interest rates illustrate the extent to which UK interest rates are ahead of other parts of the world: Sterling £ 4.64% US $ 4.48% Eurozone 2.46% Switzerland 1.03% Japanese Yen 0.12% (Source: 3 month Money Market Rates, Financial Times, 9/12/05) But don't expect to borrow money for your mortgage at these 3 month Money market rates. You will have to pay a premium for borrowing in an overseas currency. Nevertheless, if interest rates remained as they are now, there will still be significant interest rate savings to be made. So why are less than 1% of UK domestic mortgages taken out in overseas currencies? The answer: there are extra risks. Interest rates could buck historical trends and narrow the gap between sterling based rates and the rates for the currency in which the mortgage has been borrowed. This would reduce the interest rate saving and indeed, at some stage, could make the interest rate more expensive than for a standard £sterling mortgage. But by far the biggest risk lies' in changes in exchange rates. If you have borrowed in say, Yen, you eventually have to repay the loan in Yen. That would be fine if the Yen/Sterling exchange rates were frozen together – but they aren't.
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If sterling strengthened against the Yen, then you would have to convert less sterling back into yen to repay the loan than the sterling value of the money you initially borrowed. That would be great, an interest rate saving and pay back less than you borrowed. But if sterling fell against the Yen the reverse happens – you end up paying back more capital than you borrowed. So in this context, an overseas mortgage becomes a currency bet that sterling will not fall against the currency you borrowed. In other words you have converted your mortgage and what is probably your biggest personal liability, into a currency speculation. And secured your home against it! You could win but it's not for the faint at heart! Another point to be aware of is that you'll need a deposit of at least 20% for your house purchase in order to qualify for a foreign currency mortgage. Incidentally, there is now a second option. You can take out a mortgage in £sterling and have the interest rate you pay linked to a foreign interest rate. Whilst you avoid the currency exposure risk, you are still taking gamble that the overseas interest rate plus the interest rate premium you'll have to pay, will remain lower than the UK's domestic interest rates. These types of mortgage typically have a 5 year tie in clause. Therefore, you'll have a hefty penalty to pay if you want to pay it off early, although the mortgage can usually be moved to another property. For some that represents an acceptable risk, especially if the mortgage is linked to the Swiss Franc interest rate which has been astonishingly low and stable over past years. For example, the interest rates in Switzerland have not moved above 1% in the last 4 years and the Eurozone interest rate has not changed in 5 years. Nevertheless, part of the wording for a regulated investment warning comes to mind ….. past performance should not be construed as a guarantee of future performance …… You pays your money and you takes your chance.
Michael writes for Brokers Online http://www.life-assurance-bureau.co.uk who offer life insurance quotes and most UK financial services including info on mortgage rates http://www.life-assurance-bureau.co.uk/mortgages/ . Visit our finance blog for useful tips on uk finance http://www.life-assurance-bureau.co.uk/family-finance/
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What Is Currency Option Trading? By Michael Redmond
When people think about the currency market, they think of the foreign exchange market but that’s not the only currency trading market. There is also the currency options market. Currency options market deals with buying and selling the rights to buy and sell a set amount of currency in a specific time frame. That means that a person will have the right to sell a set amount of money in a given time frame at the present currency rate. So there is a great risk involved in making money. Because the foreign currency market is opened twenty four hours a day, the currency option trading market stays open the same hours as well. That makes it the sole option trading market to do so. Likewise, since the foreign currency market is unpredictable by nature, the currency option market will be the same to a certain extent. Dealing in the currency option market can be compared to betting. The question on you mind is; if you made this amount for the right to sell how much can you get back? Unlike foreign current trading where you must make your decisions fairly quickly, the currency option trading is based on a set date so you do have a little more time, which is helpful. Also, currency option trading is more flexible. You are able to shift your financial situation before the specific date of trading. Therefore, the currency market could be regarded as a safety net when in doubt about the foreign currency exchange market. Dealing in currency options trading, you must be able to look on a bigger scale and see how events affect the market. You are working with possibilities of the future. The foreign exchange market may change many times before the date you are able to sell. You will be constantly on watch in order to move when the time comes. Another thing that is necessary to deal in this market is access to the correct information. Contacts are important. One such example is, if a country has a coup, you might think that the currency will go down. However, if you have a contact, you may find out that the new government is progressive and is making changes that would help the currency. As you can see, the currency option market is a little bit different from the foreign currency market. This kind of trading relies on the foreign exchange currency market but deals with the big picture. Michael Redmond is a staff writer at http://www.trading-enthusiast.com and is an occasional contributor to several other websites, including http://www.finance-journal.com.
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