Newspaper article The Evening Standard (London, England)

It Makes Good Cents; the Weak Dollar Is Providing a Fabulous Opportunity for British Borrowers to Buy Homes. Sally Hamilton Explains How to Go about Getting a US Mortgage

Newspaper article The Evening Standard (London, England)

It Makes Good Cents; the Weak Dollar Is Providing a Fabulous Opportunity for British Borrowers to Buy Homes. Sally Hamilton Explains How to Go about Getting a US Mortgage

Article excerpt

Byline: SALLY HAMILTON

SERIOUS shopaholics think nothing of nipping across the Atlantic on a cheap flight to find bargains in the New York stores. With the pound stronger against the dollar than it has been for more than a decade, should homeowners take a similar approach to finding a cut-price mortgage?

Not only is the sterling/dollar exchange rate giving British shoppers more spending power in the malls, but it can cut the cost of home loans, too. As a further attraction, mortgage rates in the States are far cheaper than they are over here.

Homebuyers with a typical standard variablerate loan in the UK are paying up to 5.75 per cent APR following the latest hike in Bank of England base rates.

The equivalent in the US is nearer three per cent. But British borrowers do not need to fly to the States to sort out a US dollar loan, because UK-based merchant banks and mortgage brokers can arrange a deal over here.

A dollar mortgage may look like a no-lose situation in terms of the interest rate, but should mortgage borrowers who fear further UK interest-rate rises take the plunge?

Some observers suggest interest rates in the US will remain steady, especially with the Presidential election in November. If sterling continues to rise against the dollar, the value of dollar loans would fall.

Others, however, are more cautious. Cormac Naughten, head of private clients at the ECU Group, a specialist firm that manages foreign-currency mortgages, believes borrowers may have missed the dollar boat.

He says: "We're now in Swiss francs, as we think it offers a better risk-reward ratio. Sterling has just reached a 12-year high against the US dollar. There may be a risk of a sudden reversal."

Certainly the biggest risk for UK borrowers taking out a loan in any other foreign currency is a change in sterling's fortunes against their chosen currency. While a strengthening pound quickly erodes the size of the original loan, a weakening pound does the opposite. This is why ECU Group's mortgage managers do not just focus on one currency. They actively switch currencies up to six times a year to cash in on exchange-rate movements that shrink the value of a loan.

Taking into account savings across different currencies, a [pounds sterling]100,000 loan taken out in 1995 with ECU would have reduced to [pounds sterling]55,000 by June 2003. Over the same period, ECU has also achieved big savings in interest, with the average mortgage rate paid 4.47 per cent, compared with 7.9 per cent for sterling mortgages.

To limit the risks from big currency swings, the lenders used by ECU Group reserve the right to convert a loan back to sterling permanently if there is a fluctuation that increases the loan size by 10 or 15 per cent.

This means a loan that started out at [pounds sterling]100,000 could grow by up to [pounds sterling]15,000. …

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