Minimising Mortgages

In today’s ever changing and innovative financial world, consumers have become used to being introduced to new and creative means of either making or saving money. This is no different when it comes to borrowing money.

There is a little known, alternative method of borrowing that’s is focused on allowing clients to significantly reduce their monthly outgoings whilst offering the potential to reduce capital borrowings over time.

Traditionally, if a client wants to borrow money to buy a property in the UK they would go to a UK lender and pay UK interest rates, similarly in Hong Kong they would pay Hong Kong rates; wherever they were purchasing they would pay the local rates. This can be hassle especially if you are not resident in the country in which you want to buy. 

Lenders are normally nervous of non-residents, they charge extra interest if you are buying for investment purposes and they place all sorts of caveats and restrictions on what you can and can’t do with the property, these restrictions can very often lead to the purchase not going ahead as the ‘cons’ far outweigh the ‘pros’ of distance ownership.

Fortunately, for those of us based in Asia a lot of these barriers have now been broken down, as there are a number of large international banks that allow clients to purchase properties in Australia, Canada, Dubai, France, Hong Kong, New Zealand, Portugal, Spain, Singapore, the UK and US without having to leave home. These lenders will also allow clients to borrow in different currencies to that of their income or base asset and take advantage of lower interest rates, which can significantly reduce their outgoings.

Money Changing

The second objective of reducing capital borrowings is achieved by initially borrowing in a currency that is considered ‘strong’ against your base asset at the point that you take the loan out and hoping that historic trends repeat themselves and that the currency ‘weakens’ over time. Guidance on the most appropriate time to switch currency and make capital savings is vitally important in order to capitalise and reduce borrowings. 

There are two types of mortgage available, the first is the old fashioned ‘Capital & Repayment’ and the second ‘Interest Only’.

A capital and repayment mortgage is one whereby you borrow a certain amount of money over a pre-agreed term and make a payment each month to the lender. This payment is made up of two main constituents; the first being interest, the second being capital repayments. Slowly but surely over the lifetime of the loan the amount of money that you borrowed reduces and you finally get to own your home. This type of loan is unfavourable if you are only planning on keeping the property for a short time (5-10 years) as little or no capital is reduced in the early years. 

An interest only mortgage is one whereby you pay pure interest on the loan, which helps to keeps costs to a minimum today but leaves you having to find capital borrowed to pay back the loan at some stage in the future, very often by having to sell the property. Interest only borrowing allows us to be more creative when looking to meet the two objectives outlined above. 

The way it works

An example of this would be a client purchasing an investment property in the UK and borrowing GBP 150,000 from a bank. If the client were to borrow in his base currency at six percent, his monthly Capital & Repayment amount would be 967 per month: the same loan on an interest only basis would cost him GBP 750 per month. Naturally, the client opts for borrowing on an interest only basis to keep costs to a minimum and to try and get the investment to be self-supporting, as he expects to get a rental yield of six percent from the property.

Allowing for agents to manage the property and for some essential maintenance, the client’s yield is actually reduced to five percent, which means that he has to make a contribution towards the property on a monthly basis. He justifies this to himself as he hopes for capital appreciation on the property over time, which will mean he has made a good investment when he sells. 

If the same client takes advantage of a currency mortgage, and after some currency analysis he decided to borrow Swiss Francs, then he would be charged three percent rather than six percent, and so his monthly interest payment would be GBP 375, which even after his agent’s fees and essential maintenance means that he is in profit each month and the investment is self-sufficient. 

Taking the difference between what the client would be paying in his base currency (GBP 750) and what he is paying in his selected currency (GBP 375); investing it acts as a perfect hedge against adverse currency fluctuations. The client would also be getting dual use of the asset as not only would he be getting capital appreciation on the property, he would also be getting participation from the savings, which, depending on his appetite for risk and market conditions, are creating a fund that can be used to repay the loan at some stage in the future. 

In this particular example, the total cost of the house, if he were to use the traditional method would cost him GBP 425,000 over 25 years whereas utilising the Innovant Capital philosophy it would cost him GBP 261,924, and he would have the loan fully paid off after 19 years.
(*the above calculation assumes interest rates remain unaltered throughout the term and that the client invested GBP 375 per month and received a modest return of seven percent per annum).

Profit potential

The major advantages of currency mortgages over and above traditional mortgages are that as well as reducing outgoings; clients can switch between currencies on a quarterly basis and therefore take advantage of weakening currencies, which in turn will reduce capital borrowings. 

The relationship between the British pound and the Japanese yen over the last 10 years has been such that if a client got the timing absolutely perfect, then as well as reducing monthly interest payments by 75 percent against GBP rates, they would have also knocked off a staggering 35 percent from their loan. This is an ideal example of how currencies can work in the client’s favour. 

It is important to understand that currency mortgages can also work against individuals. As such, when selecting the currency at the outset, sufficient analysis must be undertaken as to which currency is the most appropriate both from an interest rate basis and also from its strength in relation to the individual’s base currency. Furthermore, the whole mortgage package must be managed on a regular basis in order to make sure that both objectives are being achieved. 

For more information please contact info@expatbusinessservice.com