Affinity Consulting Group

Multi Currency Mortgage

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Affinity Consulting Group


Multi Currency Mortgage

This service is available for anybody wishing to mortgage their UK property. The criteria are:

  • Max mortgage 65% of property valuation

  • Minimum salary 150,000 pa or currency equivalent

  • Loans up to 3x salary or 2.5x joint salary

  • Minimum loan £500,000

You must understand the risk that it is possible for the capital amount you owe to increase as well as to decrease.

Why multi currency mortgages?

There are three main benefits to managed currency mortgages:

  • Interest rate savings.

  • Reduction in the capital value of the debt.

    For example, a £1m loan is converted into US dollars at 1.80. This produces a $1,8m loan. If the pound strengthens to $2, when the loan is converted back into sterling it has been reduced to £900,000.
  • Tax efficiency.

    For private individuals borrowing against their main residence the benefits of the programme are tax free.(You should obtain confirmation of your tax position from your tax adviser.)

Clients who joined ECU's managed currency mortgage programme at its inception in 1988 are now able to fully pay off all loans taken out in 1988 with the benefits of the programme - without having paid a penny more than they would have paid with a conventional sterling interest only mortgage.

This performance has afforded clients the freedom to use all the proceeds of any endowment policies originally designed to pay off the loan, in any way they wished - for example, paying school fees, investing or financing their businesses or retirements.

Text from an article written by Cormac Naughten of ECU , published in plc Director Magazine September/ October 2003. In particular, this article explains the risks associated with single currency mortages e.g. euro or yen, in comparison with managed multi-currency debt products ...

‘Foreign Affairs‘

Turning Liabilities into Assets:
As house prices have soared to record levels wealthy individuals have had to borrow more than ever before in order to facilitate property purchases. The resulting debt mountain is now larger than that seen in the 1980s, the key difference being that there is no high inflation to erode the real value of debt. Rather, the main worry for economies such as Japan, Germany and even the US is deflation rather than inflation. In the event of deflation the real value of debt actually increases. The implication for borrowers is that their mortgage debt will persist and weigh more heavily than at any other time in recent memory. While the marketplace is flooded with innovative alternative investment products, few private banks offer solutions for the reduction or management of liabilities.

Large borrowers face a second challenge. Whereas with asset management products large transactions often attract keener pricing, those looking to borrow in excess of 500,000 find themselves excluded from most of the discount deals available from High Street lenders. Indeed, many have considerable difficulty bettering 1.5% over the UK base rate. This puts many high earners in the uncomfortable position of paying considerably more for their mortgages than their colleagues with much smaller loans.

An increasing number of financially astute borrowers believe that they have found the solution to the problems of both large borrowings and competitive interest rates by switching to interest-only loans denominated in foreign currencies.

Currency lending facilities are not generally available from High Street lenders. They tend only to be offered by a select group of private banks. Clients are expected to meet rigorous entry criteria. In addition to a minimum income of 100,000 and relatively low income multiples (2.5 to 3 times) they are expected to be financially sophisticated and to have an appetite for risk. These facilities offer three major benefits:

Debt Reduction
If the currency in which the loan is denominated in weakens against sterling then the sterling equivalent of the loan is reduced.

Loan Reduction Example:
1million @ 180 (Yen to the Pound) = Y 180 million
If the pound strengthens to 200 Yen to the Pound the loan could be converted back into sterling to crystallise a loan reduction: Y180 million/ 200 = 900,000

Interest Rate savings
Even with UK rates at their recent low levels UK borrowers can make considerable savings by borrowing in foreign currencies. Over the last 15 years the cost of servicing loans in the world's major currencies has been 40-75% lower than it would have been in sterling.

Tax Efficiency
For an individual borrowing against their main residence in foreign currency, neither the interest rate savings nor the capital reduction of their mortgage have been liable to capital gains tax.

There is currently considerable demand from borrowers earning in dollars or euros for loans in these currencies on their UK properties. Given today's international employment market, directors of major global companies are often moving to the UK, and UK executives are themselves expected to move abroad. Many "Inpatriates" (executives moving to the UK) and expatriates seek to match the currency of their income with that of their mortgage to avoid conversion costs. Directors of multinational firms can often expect some or all of their compensation to be paid in euros or US dollars and there are a number of private banks looking to persuade these customers of the merits of a loan in the same currency. But are they right to do so - surely this combination of loan reduction and lower interest payments sounds too good to be true?

If all this sounds familiar it is because many people did take out currency loans in the 1980s and early 1990s - some with disastrous consequences. The preferred vehicles for most were single-currency loans in either Japanese yen or Swiss francs as they seemed to offer a low interest rate compared to the double-digit rates seen in the UK. Unfortunately these borrowers saw the pound weaken considerably against other currencies, causing the sterling equivalent of their loans to increase dramatically. For example, a million pounds borrowed in yen in 1980 would have become four and a half million pounds by 1995.

Consequently lending banks now agree conversion limits with their customers before they take out a currency loan to limit these dramatic increases. Typically these are set 10-15% higher than the starting loan balance. If the sterling equivalent of the client's loan then rises to that predefined limit, the bank reserves the right to covert the loan back to sterling thus crystallising a permanent 10-15% increase in the loan and subjecting the loan once again to sterling interest rates.

Currencies can easily fluctuate by 15% over the course of a year. Accurately forecasting a ten-year view (a typical mortgage term) on a particular currency is almost impossible. What is certain is the historical weakening of sterling against other major currencies. At the start of the 1980s the pound stood at 550 to the yen, 2.40 to the dollar and 4.50 to the Swiss franc. Today it stands some 35-65% lower at 185, 1.60 and 2.20 respectively. This risk of an increase in the size of the loan itself makes the impact of currency movements on interest payments pale into insignificance.

Managing the risks:
The need to manage these risks led to the emergence of the multi-currency mortgage. This offered clients the flexibility of denominating their loans in the currencies of their choice and, if world events altered the outlook for this currency, the client could switch into another currency at will.

For most individuals, the volatility of the foreign exchange markets and the need for extensive analysis and monitoring has meant that managing foreign exchange risk extends beyond the scope of their resources. In the absence of the client having currency trading experience, most lending banks will not extend a multi-currency loan facility unless an approved currency management firm has been engaged.

A currency debt manager's role is to seek to maintain the client's debt in currencies that are expected to weaken against (or at least remain stable against) the pound, consistent - where possible - with an interest rate advantage. Given sterling's long term propensity for weakness, this is no simple task.

The approach of today's leading players in currency debt management mirrors that of leading hedge funds. They blend technical and fundamental analysis, underpinned by market intelligence and experience provided by investment committees comprised of some of the industry's most highly acclaimed economists and analysts.
Over the last 15 years trading systems have been developed in conjunction with the lending banks that allow managers the flexibility to adopt a range of 24-hour risk management tools for entering and exiting currency positions. Despite this, prospective clients are advised that they must be able to withstand a permanent increase of at least 15% in the sterling equivalent of their loan.

While currency borrowing is not without risk, neither is leaving liabilities unmanaged. For those that are prepared to take these risks on board the benefits can be considerable. Clients of some currency managers have seen their loans reduced by some 45% over the last seven years. Borrowers in other countries have firmly grasped these benefits. For example, in Austria the currency loan market stands at 43 billion euros or one in ten of all mortgages. Recently Europe has been held up as a model for the UK mortgage market. Perhaps without realising it commentators may have stumbled upon the right idea after all.

The ECU Group plc
Regulated by the Financial Services Authority
73 Brook Street, London, W1K 4HX
Tel: 020 7245 1010, Fax: 020 7245 0088

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