Foreign currency mortgages

The strength of the pound against the dollar recently has seen many Americans heading across the Atlantic to claim the many bargains available to high street shoppers. Less well known, but growing in popularity, is the possibility of taking out foreign currency loans, especially dollar mortgages, and using currency speculation to significantly reduce the amount of the loan over time.

‘Holding a loan in a falling currency can help to reduce the outstanding debt by thousands of pounds in just a few months.’ These loans are usually arranged so that only the interest is covered by the repayments while the total is gradually reduced by fluctuations in the currency markets.

Foreign currency mortgages are dangerously high interest

The attraction of this kind of loan is, therefore, obvious. The major drawback should, however, also be obvious; the high risk inherent in betting on a fluctuating market. Currencies can move in either direction and rather than decreasing the size of your loan, it could increase substantially.

A broker, said: “We have had more interest in foreign-currency products in the last six months from people who think they can benefit from currency movements and lower interest rates abroad. However, when the risks are explained, most decide against it.”

Risk is an integral part of many speculations where it is managed and minimised as appropriate and this takes a certain amount of dispassionate calculation. When it comes to people’s homes, however, they are just not willing to do this. A home is not a speculation but an investment and decisions need to be taken accordingly. For many people risk should not just be minimised when it comes to their home but be absent altogether.

The risk involved in foreign currency loans does not mean that they should be avoided entirely, but they should certainly be approached with a great deal of caution. I would suggest that they are of more relevance with second houses, which can be treated as a speculation and will tolerate a greater degree of risk. For a primary dwelling, the family home, risk is just simply unacceptable and so foreign currency mortgages are to be avoided.

Kids borrow money off parents

In light of the credit crunch and the associated drying up of traditional credit funds a new report that is interesting, timely, and personally relevant has been made available. It states that 55% of parents have given or lent their children or grandchildren an average of £12,000 in the last year.

Parents helping kids financially

The YouGov poll of 5,783 adults suggested a 16% increase in the number of parents giving or lending money to their offspring, compared with 39% last year.

More than half (52%) also claimed that they were expecting to have to hand over some more in the future.

More than a third (36%) of those asked said that they had been planning to use the money in retirement, although 63% said they were happy to help out.

‘It seems that although people could well be tightening the purse strings at a time when the credit crunch could affect finances, adult children are still managing to extract what they can from mum and dad,’ said a spokesperson for the polling organisation.

Four in ten (42%) of recipients use the money to pay off debts, compared with 22% last year, the survey says, while one in three used it to get on the property ladder.

The 29% that used it to help buy a house is expected in increase this year following the recent end of 125% mortgage deals and a squeeze on first-time buyers when Nationwide interest rates for borrowers without substantial deposits were raised.

Kids borrow money for cars

Other typical uses for the loans were to pay for a car, living expenses, education fees or household expenses such as furnishings, the survey said.

There is a slight feeling that this survey is just stating the obvious since most people can figure out that wealthy parents continue to help their children financially far beyond their schooling and university.

The wider effects of this on the economy are varied. Consumer spending will be helped despite the down turn in credit. However, pressure on pension funds, both public and private, will increase since peoples wealth is passing down the family rather than providing for their retirement.