Smart Planning could Shrink your Mortgage
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Managed currency mortgages are loans that are switched between currencies by a professional currency manager, with the aim of achieving the following three potential benefits: |
- Reduction in mortgage size without even making repayments: if the loan is placed in a currency which weakens against the pound, then the sterling equivalent of the loan is reduced. For example, if a £1 million loan is converted into US dollars at 1.40 (each pound = $1.40), this produces a $1.4M loan. Should the pound strengthen to $1.60, the loan is reduced when converted back to sterling ($1.4/1.6 = £875,000).
- Lower Interest Rates: interest rates in the UK have tended historically to be much higher than those of the other major economies. Even though the present UK base rate is low at 0.5 percent, Japanese interest rates are 0.1 percent.
- Tax Efficiency: for an individual borrowing against their main residence, buy to let or commercial property, neither of these benefits has been liable to capital gains tax.
This is not a retail product offered by High Street lenders, rather it is a wealth management tool provided by a select group of private banks. Clients are expected to meet rigorous entry criteria. In addition to a minimum income of £150,000 per annum and relatively low gearing (maximum loan-to-values of 55-60 percent), they are expected to have an appetite for risk. Currencies can fluctuate considerably and clients must have the temperament to deal with this.
Lending banks seek to limit the potential downside for clients by reserving the right to convert a currency mortgage back into sterling if it increases by 10 percent, breaching what is known as a conversion limit.
For those prepared to take this additional risk, the benefits can be substantial. The ECU Group plc, the UK’s largest currency mortgage manager, has performance figures since 1st November 1988 showing that a £1,000,000 loan would have been reduced to £179,794 by September 2009 through debt reduction and interest rate savings net of fees.
The key to unlocking these benefits lies in finding the right currency manager. If this is an avenue that you would like to explore further, please contact Andrew Kidd, Associate, Silverman Sherliker Solicitors on +44 (0)20 7749 2700 or ajk@silvermansherliker.co.uk
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