Anybody who owns or is thinking of buying a property will have no doubt recoiled at the impact increasing interest rates are having on monthly mortgage repayments. Many onshore banks, due to demand from property owners, have introduced Foreign Currency Mortgages which gives clients the facility to switch the loan currency into one where interest rates are considerably lower. Offshore lenders can offer this facility and whilst it is not without risk, it may offer an attractive solution to keeping payments at a minimum.
The purchase of a property is, for the vast majority of people, likely to be one of the largest personal investment decisions with which the individual is faced during his or her lifetime. The associated financing arrangement is likely to be one of the largest single exposures to debt that the individual will ever face. As such it requires careful consideration.
So, Which Currency to Choose?
A great question! Some people in Asia express uncertainty as to where they and their families will be located in a few years time, where their principal source of income will be generated and hence the currency in which it will be denominated. Most are trying to avoid the ‘financial handcuffs’ that accompany a typical retail loan arrangement and seek more imaginative packages affording greater currency flexibility.
To be locked into one particular currency during the whole repayment period may well be inappropriate given the situation faced by many people in the region. It could well be more appropriate for a borrower to seek a currency switching option whereby he or she has the facility to finance in one currency today and retain an option to convert into another currency at a later date. For example, a borrower may choose to finance in Sterling pounds today and later switch to US dollars should movements in cross-rates present an opportunity to minimise cost or should his or her principal source of income change.
Generally speaking, it is wise to match the currency of assets (either fixed or liquid) with that of liabilities e.g. a UK property asset with a Pound Sterling loan would match a fixed asset with the loan liability. Many people, however, opt to match more liquid assets such as savings, salary, future provident fund proceeds or even existing assets, with the loan.
In this case, the English property may be matched with a US dollar loan serviced by a US dollar salary for example. The choice depends largely upon personal circumstances and future plans, though the ability to switch currencies during the life of the loan could prove valuable at a later date.
Should a borrower anticipate income streams in more than one currency eg Sterling pound and US dollars, then theoretically he should initially draw the loan in the currency which he believes will weaken relative to the other. If currency switching is available, then once the chosen currency has so weakened the loan may be switched to the other currency and a saving in capital effected.
The Drawbacks
Anyone considering a mis-match between the currency of the loan and their assets should tread very carefully. Borrowers are sometimes tempted to do this in order to secure a loan in a currency with low interest rates. Unfortunately, significant movements in currency cross-rates can occur very quickly, wiping out any savings through lower interest rates and leaving the borrower stranded. Playing the forex markets with mortgage monies is definitely not for the faint of heart or financially weak and careful consideration must be given before opting for a mortgage of this nature.
