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The Dangers of Foreign Currency Mortgages

It has recently been announced that leading private banks, such as RBS International and Lloyds International, are no longer offering mortgages in foreign currencies. This whole market got into real trouble in 2008 when the property market and Sterling crashed and people who owned overseas property saw their foreign currency debt increase significantly.

It is long overdue that these mortgages were pulled and I think they should never have been sold to most people in the first place.

The problem, as is sadly so often the case with bank products, is that they were aggressively sold and banks took advantage of people who did not have enough knowledge. This type of mortgage is a very niche product and should only have been made available to people with a good knowledge of the foreign currency market.

The sales pitch was that by transferring your debt to a currency where the interest rates were lower than the UK, you would pay off your debt quicker. This worked, for a while, until 2008 when Sterling crashed in value.

Many people were persuaded to take out mortgages in Swiss francs because the interest rate was low, but since 2007 the Swiss Franc has soared by over 40% against Sterling as the currency is seen as a safe haven from the Eurozone’s financial woes.

Cyprus is in the news right now, of course, with the country on the verge of going broke. Swiss Franc loans were also sold here to thousands of Foreign Nationals and locals in 2007 as the interest rate was much lower than that of the Cypriot Pound.

Borrowers were asked to pay around 8% on loans in Cyprus Pounds compared to around 4% in Swiss Francs. Appealing? Yes, until you now consider that Greek/Cypriot banks are coming after UK expats properties in Cyprus and potentially their UK homes too. It has been reported that in Cyprus, Alpha Bank has over 1,200 UK homeowners that it plans to repossess.

People have managed to switch the currency of their mortgage, but those who have done this without assistance have often ended up in a worse situation as the rate applied has been unfavourable.

My view is that you should always take out a mortgage in the currency of the country where you intend to buy, or if not, you should at least have earnings or receiving rental income in the currency of the mortgage.

Be careful dealing with the foreign currency market on your own, as it can be very volatile– even the Bank of England didn’t see the crash coming. We recommend you consult a Currency Exchange company such as Moneycorp. They can provide expert guidance to help you trade at the right time. If in doubt, stick with the tried and tested route.

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Details correct when this article was originally posted on April 18, 2013.