The Dangers of a Foreign Currency Mortgage

In the 2000s some British mortgage borrowers who were sold complicated foreign currency mortgages are suffering a disadvantage with high repayments and increasing debt because of large fluctuations in exchange rates. The hardest hit borrowers have been those with home loans linked to the Japanese yen which has recent lyrisen to levels not seen in over 20 years.

Many experts believe that these foreign currency mortgages should never have been sold to clients who did not fully appreciate the risks attached to such deals and urge clients to always take professional advice regarding foreign currency loans.

Japanese yen foreign currency mortgages were sold in the early to mid 2000sin order for borrowers to take advantage of the low interest rates in Japan at a time when interest rates were not low in the UK. This meant that monthly mortgage repayments were less expensive than for a normal UK mortgage. In 2004the difference in yen mortgage interest rates and sterling interest rates was about 5 per cent so the savings were substantial.

However, the risk associated with a mortgages in a foreign currency is that if the foreign currency increases in value against sterling, the monthly repayments go up in equivalent sterling terms. In addition, the total amount of the debt in sterling also rises.

Shocking figures that illustrate just how great this risk is show that a Japanese yen based mortgage equivalent to £500,000 in 2004 would have increased to a debt of £770,000 by 2009 and a staggering £855,000 by 2012 because the yen-sterling exchange rate had risen from 200 to 117 to the pound over that period.

Japanese yen, Swiss franc and US dollar mortgages were all sold by well-known British banks in particular to UK expats living overseas, but experts have argued that foreign currency mortgages are only suitable for sophisticated investors who understand the risks. Foreign currency mortgages can be a good solution for some high net worth clients who, for instance,do not receive their income in sterling or who have major assets in foreign countries. Such investors can benefit from this type of deal but banks were selling these loans in the 2000s to less knowledgeable investors as a means of just reducing the interest rate payable. There was no managed multi-currency loan arrangement to hedge the associated risks so it proved to be a highly risky strategy.

Some of the borrowers whose mortgages have been adversely affected by the yen exchange rate rises have reported that they were not fully warned of the dangers of such loans. Furthermore, many of them are not covered by the UK financial services jurisdiction so cannot have their complaints investigated by the UK's financial ombudsman.

High net worth mortgage experts believe that foreign currency mortgages are harder to obtain now than they were 10 years ago but many banks still offer this facility in the UK. Anyone considering such a home loan should take professional advice from a high value mortgage broker with experience in this type of lending and ensure they fully understand the risks before agreeing to such a loan.