Everybody knows that the amount you pay for your mortgage depends on the interest rate set by the Bank of England. If interest rates go up, so does the cost of lending and therefore the cost of borrowing too. Which means you’ll get a letter from your bank or building society increasing those monthly payments.

Because we borrow huge amounts to purchase property, even tiny fluctuations in the base interest rate (set by the Bank of England) can have a big impact on our monthly mortgage payments. It’s no wonder that the chance to reduce the interest rate at which we pay off our loan is an attractive goal for any homeowner.

International Interest Rates Interest rates vary from country – or monetary zone – to country. Traditionally England has higher interest rates than are commonly found in the Euro zone, American or Japan. Even today, when interest rates in the UK are historically low, – around 4.5% - they are still high when compared internationally.

What is a foreign currency mortgage?

Now, very few people realise that it is possible to take out a mortgage in a foreign currency – in, say, Japanese Yen or Euros. In so doing the borrower is charged at the interest rate of that currency. So it is possible for an British borrower buying a house in the UK to borrow in Euros and benefit from the lower cost of borrowing in the Euro zone.

How it Works

You take out a mortgage in a foreign currency (eg Euros, US dollars, Yen or Swiss Francs). The bank / mortgage lender you borrow from converts this money into sterling and secures the debt against your house in the UK.

You pay the interest rate on the original foreign currency loan ie you are paying at the interest rate of that country – which will hopefully stay much lower than good ole sterling.

The Advantages

There are two main advantages to borrowing in a foreign currency.

1) You can take advantage of those lower interest rates. This could lead to significant savings. For instance if you borrowed in Yen the difference in interest rates could be as much as 4%, or if you went for Euros, up to 2%. On a typical mortgage the potential savings could run into hundreds of pounds per month.

2) On top of any savings on interest payments you might take advantage of currency markets as well. For example: If you are borrowing in dollars and the pound raises in value against the dollar you’ll be able to buy more dollars for your pounds making a foreign currency mortgage even cheaper.

What could possibly go wrong?

Ah well now... A lot. Remember the old saying about how investments can go down as well as up? Well this applies, perhaps even more so, to the currency market and to the interest rates of different financial zones.

1. Currency rates are notoriously unstable. There is no guarantee that the currency that you have borrowed will stay the same in relation to sterling – it might go up but could go down. And that of course means that you lose money.

2. The same thing is true of interest rates. If interest rates rose in the currency zone of your choice again you could find yourself paying more. And there is no protection against these rises. In fact the risks are such that less than 1% of mortgage borrowers have gone down this route.

Other Problems

There are other problems associated with borrowing in a foreign currency:

· Most lenders will offer a maximum of 75% of the loan – compared with 90% or even more in the UK. So you have to find a bigger deposit to cover your house purchse..

· There are additional administration costs which will eat into any savings made.

· Lower interest rates set by the central bank in a region don’t always mean lower borrowing rates. In fact, because of the great competition in borrowing in the UK and the amount of borrowing required to purchase property, lending rates are not so different to those available in the Euro zone and other low interest currency zones.

Useful tips

If you are interested in foreign currency mortgages here are some tips to help reduce the risk:

· Remember that this is a high-risk strategy – you must be able to afford to take loses if things go badly. The smug charmer I mentioned worked in the City and was obviously rich – despite apparently having a small brain.

· Talk to a competent advisor before going ahead with any transaction.

· Preferably approach a UK lender that deals with foreign currency mortgages. Not many do.

· In some countries (such as Germany) fixed rates over long periods (up to 20 years) are much more common than they are here – this kind of mortgage could offer some protection against interest rate rises.

· Look at ways of spreading the risk. One option is multi-currency mortgages. Borrow portions of your mortgage from a selection of interest rate zones and currencies – you may lose in one but you’re unlikely to lose in all.

Another option is a multi-currency switching facility where you can switch out of a currency that is falling or away from an interest rate that is rising. However this kind of scheme is expensive to manage – broker commissions for each transaction will add up and if you use a management company there will be further fees. Running such an account yourself would require time, dedication and skills unusual in an amateur investor.

Enter the Euro zone

You might be tempted to borrow in Euros in the belief that the UK will, eventually, enter the Euro zone anyway.

At the moment, however, entry to the Euro zone seems more and more uncertain and it would be rash take risks based on this kind of prediction.

Of course, some people are employed by multi-national companies who can pay salaries in Euros. For these people borrowing in Euros carries fewer risks - but it is still essential to take expert advice before doing so.

Summary

In conclusion, despite the potential savings, foreign currency mortgages are not for the faint hearted.

Remember, you are borrowing a huge amount when you buy a house. Risking it all in the dangerous waters of the international money market is a decision that should not be taken lightly.

Finally

Don't forget old Ma Mortgage Sorter's Golden Rule: Always get three quotes when buying any UK financial product.

The author was a placid herbivore who kept being overcharged by the piranhas of the UK Personal Finance "industry" . One day he woke up, smelt the napalm and decided to get even by writing an independent website information guide on UK mortgages http://www.mortgagesorter.co.uk/uk_mortgage_quotes.html© MortgageSorter.