With foreign currency mortgages the risks are high but they have the potential to save you a lot of money. This article investigates.

Foreign Currency Mortgages - take advantage of some of the worlds lowest interest rates but the risks are sky high.

Author: Michael Challiner

In the UK over 99% of borrowers raise the mortgage they

Despite increases in 2005, the UK's domestic interest rates are low by its' own historical standards. However, they remain significantly higher than in Eurozone, America, Switzerland and indeed, Japan. Therefore, currently you can take out a mortgage in Euros, $ dollars, Swiss Francs or Yen, convert the money you've borrowed into sterling, secure the debt against your house in the UK and end up paying a much lower rate of interest.

You may think that UK interest rates are low, but if you look at the 3 month money market interest rates you'll see that they remain significantly higher than in other parts of the world:

£ sterling 4.64%

$ US 4.48%
Eurozone 2.46%
Swiss Franc 1.03%
Yen Japanese 0.12%

(Source: Financial Times, 3 month Money market Rates, 9/12/05)

But you won't be able to take your mortgage out at these 3 month Money market rates. You'll have to pay a premium for borrowing in a foreign currency and the set up costs will be higher. Nevertheless, if interest rates were to remain as they are now, you could save a lot of money on your interest payments.

So why do 99% of UK domestic mortgage holders still choose a domestic UK mortgage? Most borrowers are unaware of foreign currency mortgages but that's not the main issue. The primary answer is that there are extra risks.

International interest rates are constantly changing and gap between sterling interest rates and the foreign currency rate you've borrowed in, could narrow. This would reduce the interest rate saving and, if that trend continued, could make your interest rate more expensive than a standard £sterling mortgage.

But the biggest risk by far lies' in fluctuations in currency exchange rates. If you borrow in say, Euros, you eventually have to repay the loan in Euros. That would be great if the Euro/Sterling exchange rate was fixed - but they aren't.

If the £ sterling strengthened against the Euro, when it came to repaying the mortgage you would need to convert less £ sterling into Euros than the £ sterling value of the money you received when you first took out the mortgage. That would be great, a lower interest rate and repay less than you borrowed.

But what happens if the value of sterling falls against the Euro as has happened in recent times?

You still have to repay the same number of Euros but you'll have to convert more £ sterling to achieve that. In other words you end up paying back more capital than you borrowed.

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Did you Know?
The European Health Insurance Card (available through UK Post Offices) allows UK citizens to receive medical treatment in other EEC member state for free or at a reduced cost, if medical treatment becomes necessary during their visit or if they have a pre-existing condition which necessitates medical care (such as kidney dialysis).

The scheme's intention is to enable people to continue their stay in an EEC country without having to return home for medical care. As such, it does not apply to people who have visited a country for the purpose of obtaining medical care. Nor does it cover medical care that can be delayed until the visitor returns to the UK.

Furthermore, the European Health Insurance Card only covers healthcare which is normally covered by a statutory health care system in the country visited, so conventional travel insurance is still necessary.

Did you know?
If you are looking for cheap car insurance , then shopping on the Internet is sure to come up trumps. That's why Internet sales now account for 53% of all car insurance. And when it comes to renewal time, remember to shop around again! Don't automatically accept a renewal notice - you may still find it cheaper!

Did you know?
A survey conducted by Experian the credit reference agency, found that 54% of loan applicants for were refused whilst 43% were offered a loan but at a higher rate than that advertised. That's why, if you're searching for cheap loans , it's usually best to go through a loan broker who will know the lenders who will suit your circumstances.

Did you Know?
Early methods of transferring or distributing insurance risk were practiced by Chinese and Babylonian traders as long ago as the 2 nd and 3rd millennia BC. Chinese merchants traveling treacherous rivers would redistribute their stock across many boats to limit the loss due to any single boat sinking. The Babylonians devised a system which was recorded in the Code of Hammurabi, circa 1750 BC and was used by early Mediterranean sea traders. If a trader received a loan to fund his shipment, he paid the lender an extra sum in exchange for a guarantee that the lender would cancel the loan should the shipment be accidentally destroyed or stolen.

According to the Council of Mortgage Lenders, last year over 200,000 homes in the London area were financed by an interest only mortgage without a repayment vehicle being in place. Of these, 60,900 buyers were first-timers.