Many UK workers have come to the conclusion that they have better career opportunities outside of the UK, either on a temporary basis or permanent. The reasons are clear: the rate of economic expansion is weaker than in Asia, the US and some European Countries; Switzerland and Germany in particular. The demand for specialist labour is high among fast-growing economies. Expatriates may wish to:

- Purchase a property to live in when they return to the UK or where their families can live
- Purchase an investment property
- Release capital tied up in UK property

A prominent type of mortgage for consideration by UK expatriates is a Foreign Currency Mortgage.

Foreign Currency Mortgages offer benefits where the mortgage is denominated in the same currency in which income is paid. For example, if you are working and living in Germany, a Euro-denominated mortgage and potential savings from foreign currency conversions are on the cards. The benefits are:

- There is no need to switch between currencies; you borrow in the same currency in which your income is paid.
- You may achieve savings by borrowing in low interest rate currencies.
Some of the main currencies in which mortgages are available are US Dollars, Euros, Sterling, Japanese Yen, Hong Kong Dollars and Swiss Francs.

Foreign Currency mortgages can be used for both personal and company mortgages. The interest rates on a foreign currency mortgage are based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower’s domestic currency. Therefore a foreign currency mortgage should only be considered when the interest rate on the foreign currency is lower than the borrower can obtain on a mortgage taken out in their domestic currency.

The borrower has a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower’s domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. A capital gain is achieved. However, if the exchange rate of the borrower’s domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. A capital loss is created.

When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging.

A borrower can appoint a specialist currency manager to manage their loan on their behalf where the currency manager will switch the borrower’s debt in and out of foreign currencies as they change in value against the base currency. A successful currency manager will move the borrower’s debt into a currency which subsequently falls in value against the base currency. The manager can then switch the loan back into the base currency (or another weakening currency) at a better exchange rate, thereby reducing the value of the loan. A further benefit of this product is that the currency manager will try to select currencies with a lower interest rate than the base currency, and the borrower therefore can make substantial interest savings.

There are risks associated with these types of mortgages and the borrower must be prepared to accept an (often limited) increase in the value of their debt if there are adverse movements in the currency markets. A successful currency manager may be able to use the currency markets to pay off a borrower’s loan (through a combination of debt reduction and interest rate savings) within the normal lifetime of the loan, while the borrower pays on an interest only basis.

Foreign Currency Mortgages are a very complex area of finance and specialist advice should be taken when considering them.

www.eafsolutions.co.uk