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.