How to profit from your mortgage
By Chris Gilchrist
Sound like a pipedream? It's not... not if you are well-off and prepared to take a chance.
Most mortgage articles are about saving money by paying less interest. This article will show how an unusual type of home loan - the multi-currency mortgage – not only aims to reduce the interest you pay but, more importantly, the total value of your debt.
When you borrow with a conventional mortgage you borrow in pounds sterling. Multi-currency mortgages work by converting your mortgage debt from sterling into currencies which are expected to weaken against the pound. Over time this can reduce the size of your loan dramatically and mean you pay less interest than you would do borrowing in sterling.
Suppose that you had switched a £1 million mortgage from sterling to US dollars when the exchange rate was $1.60. Your mortgage would now be $1.6M but at today's exchange rate of $1.88 it would only take about £850,000 to pay off the loan.
As long as there is a gap - as at present – between what you have to pay for a mortgage in sterling and what it costs in Japanese Yen or Swiss Francs you could also potentially reduce your interest payments.
But most people who have multi-currency mortgages are not seeking to cut their interest costs but to reduce the amount they owe. In fact many keep paying in the same sum each month to their mortgage account even if the interest rate falls. They then use any surplus generated to help pay their mortgage off early or to cover potential adverse currency moves.
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How well do multi-currency mortgages work?
Several private banks will allow you to borrow in foreign currencies but few people would want to manage the currency switches themselves. So how about getting someone to manage this for you?
This, in a nutshell, is what The ECU Group plc does. Its trading team manages over $1.25 billion of currency mortgages so they get inter-bank exchange rates, far more favourable than you or I would get on the high street. On average they make about fifteen currency switches a year. Their performance data shows that clients who joined their programme in November 1988 could now have actually paid off their mortgage just with the combined benefits from these switches and the lower interest rates paid.
In the five years to 31st December 2005, The ECU Group managed to reduce the capital owed by their clients by 24%. Include the interest savings and the trading benefit increases to 40%. In the three years to December 2005 the loan reductions alone was 16%.
What if sterling gets weaker not the other currencies?
Currency markets are notoriously volatile and prone to swings in sentiment, so ECU make clear that currency loans are only suitable if you can afford to see the value of your debt increase by up to 15%. If the value of the mortgage moves against you by 15% or more then the private banks that extend these lending facilities have the right to trigger a conversion back into sterling.
Typically ECU clients must earn at least £100,000 a year, with a mortgage of at least £250,000 at a maximum loan-to-value ratio of 65%. The average size of the mortgages they manage is over £1 million.
Therefore, currency mortgages are not for the faint-hearted nor should they be considered by anyone that cannot handle a big increase in the size of their home loan. For those who are prepared to accept an element of risk this is an interesting alternative to traditional mortgages.
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Important! Please read…
Foreign exchange movements can be sudden and substantial. At no stage should you expose yourself to the high risks of foreign currency exposures if you are not able to afford the potential losses that could result from sizeable adverse currency movements and the higher interest rate servicing costs that would be required of you in the event of your having a larger debt.
Denominating debt in foreign currencies may not be suitable for you. Changes in the exchange rate may increase the sterling equivalent of your debt. Your lender will not tolerate too great an increase in the sterling equivalent of your debt as a result of currency losses and may opt to convert your debt back into sterling at a predetermined level.
This may result in a permanent increase in the sterling equivalent of your debt which is not fully compensated for by any other benefits derived during the course of The ECU Group plc's discretionary currency debt management services. In this event, you could be left paying UK interest rates on a larger amount of sterling debt than that you originally borrowed. Your home may be repossessed if you do not keep up repayments on your mortgage.
Your lending bank sets a 'Conversion Limit' at which level they have the right to convert your managed multi-currency mortgage back into sterling to prevent further currency losses. It is important to understand that this is a right of your lending bank and not an obligation and that if they do not act promptly to convert your loan back into sterling when your Conversion Limit is reached, your loan could increase by more than that specified by your Conversion Limit.
ECU may from time to time transfer your loan into foreign currencies with higher interest rates than sterling with the objective of achieving a debt reduction in that currency.
Sterling interest rates are subject to change and the differential between sterling interest rates and the interest rates of other foreign currencies will fluctuate.
