Foreign Currency Mortgages
If you are looking for a mortgage on a UK property, but earn in a foreign currency, there may be more options available to you than you think. Recent political and economic changes and new regulations may have made some investors buying in a foreign currency less likely to make big financial decisions. However, there are still many attractive rates worth considering, especially at a time when foreign currencies are strong against the pound sterling and there are great rates available.
What denotes a foreign currency mortgage?
A foreign currency mortgage is one that is serviced or repaid in a different currency from the borrower’s income1. Income here includes any assets used to repay the mortgage, which are received in a different currency to the loan. This could consist of salary, bonuses, and/or shares2.
Borrowers, who may currently be working for international bodies or local firms in Central mainland Europe, Asia, or America, who receive their pay in a currency other than pound sterling, will be affected. This could be in US Dollars, Euros, Japanese Yen, Chinese Yuan, or Hong Kong Dollars among others. You can read more on how to get a mortgage as a foreign national, specifically for those from the Middle East, here.
What is holding some investors back?
1. Regulatory change
The EU Mortgage Credit Directive (MCD), introduced in March 2016, put in place new requirements for lenders providing foreign currency mortgages3. The EU MCD requires lenders to monitor exchange rate fluctuations, and to update their customers when exchange rates vary by 20% or more from when the mortgage completed4. Lenders will then be required to offer borrowers the option of switching the loan into the currency of their income5. The borrower does not have to take action, moving the currency risk from the borrower to lender6.
Nigel Bedford, Senior Mortgage Manager at Large Mortgage Loans, comments that:
“It was easier for banks to stop offering such loans, rather than amending their regulatory policies. Once the UK has formally withdrawn from the EU, it is possible to speculate that restrictions holding down lenders in the UK may loosen. Therefore, foreign currency mortgages may become more widely available.”
Until this becomes clear, there are still options for those looking to borrow in a foreign currency. Although the MCD has led to somewhat tighter affordability criteria, the risk for borrowers is greatly reduced. Therefore, this may make now a good time to consider a foreign currency mortgage.
2. Global economic shifts
Over the past year there has been much political and economic uncertainty, both in the UK and globally. This political uncertainty could for the most part, be attributed to elections in Europe, for which the outcomes were hard to predict. The Brexit negotiations doubtlessly also have a part to play. These events are causing shifts in exchange rates, with sterling fluctuations likely to occur throughout the duration of our exit from the EU and maybe even beyond.
Why would a foreign currency mortgage be a good investment now?
The current global economic uncertainty may deter investors from taking out a mortgage in a foreign currency, although it does not need to. Considering the current strength of some foreign currencies against the pound7, now could be a great time for investors earning in a foreign currency to consider taking out a mortgage in the UK, despite possible fluctuations. Additionally, there are some attractive rates and terms for those people who can satisfy the lenders criteria currently available.
Tom Foster, Mortgage Manager at Large Mortgage Loans, explains what measures are in place to protect against currency fluctuations:
“The pound has hit historical lows against the US Dollar, whilst being undervalued against the Euro. These are two of the major currencies that people earn their income in. Specialist Foreign Exchange companies can fix a conversion rate to protect against fluctuations in exchange rate which move in the wrong direction. This provides a safety measure to an extent.
From a responsible lending perspective, most lenders will now also factor in a 20-25% reduction in the foreign currency income when assessing affordability, thus providing a further layer of protection.”
It pays to seek professional advice if seeking a foreign currency mortgage, especially in times of such economic uncertainty and tight lending regulations.
Read here how we secured a £4.6 million residential mortgage on a UK property for a foreign national earning in US Dollars.
Your home may be repossessed if you do not keep up repayments on your mortgage. Changes in the exchange rate may increase the sterling equivalent of your debt.