Borrowing across borders
If you want to buy a UK property using your non-sterling income then a foreign currency mortgage could be an option to explore
3 min read
Many of us only become aware of the impact of exchange rate fluctuations when we go on holiday. Trips abroad have become more expensive for UK residents since the Brexit vote, which triggered a dramatic fall in the value of the pound against other major currencies, including the US dollar and euro.
However, sterling weakness has boosted the earnings of the estimated 200,000 people living in the UK who are paid or receive bonuses in another currency. They include people working in the financial, energy and technology sectors, diplomatic staff and Members of the European Parliament, for example, as well as sports professionals, musicians and actors.
The strength of other currencies against sterling means that the UK remains an attractive investment destination. Sterling is still at historically low levels and the potential for a rise could boost returns for non-sterling based investors.
Managing currency risk
The implications of further volatility in currency markets could create headaches for anyone living or working in the UK who depends on non-sterling earnings. For example, consultancy firm Deloitte has recently warned businesses that any US employees working in the UK who are paid in sterling rather than dollars, could ask for a raise to cover the cost of any mortgage or loan repayments back in the US.
For example, American banks tend to pay annual bonuses in dollars, and they can be significantly higher than their salaries. As a result, borrowers who rely on these one-off payments can find themselves with unexpected shortfalls when exchange rates move sharply, and these can affect their ability to meet obligations like their mortgage.
If you have a sterling-denominated mortgage on a UK property and receive some or all of your income in another currency then you will be exposed to foreign exchange risk. However, providing your circumstances meet strict regulatory and policy guidelines, it’s possible to manage this risk by borrowing in the same currency as your income through a foreign currency mortgage.
For instance, if you live and work in the UK but receive your bonus in US dollars, you could qualify for a foreign currency mortgage. While the mortgage itself is calculated in pounds, allowing you to buy your property in the UK, the actual value of the debt remains in US dollars. you would repay the mortgage in instalments in the currency of your mortgage.
However, you need to keep in mind that you still face some foreign currency risk due to volatility in the foreign exchange markets. For example, currency movements could make the loan more expensive if the currency of your income weakens against sterling.
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A tight regulatory environment
The EU Mortgage Credit Directive (MCD) introduced in March 2016 ruled that lenders offering foreign currency mortgages must meet a new set of affordability requirements and put processes in place to monitor currency fluctuations. New regulations have also been established to provide greater client protection.
The regulations have affected two types of mortgage in particular:
- interest-only mortgages where the repayment vehicle is in a different currency to the loan
- mortgages taken out by people living in a country where the main currency is different from the loan currency – in essence, overseas borrowers
The new provisions have seen providers withdraw from the market as the balance of currency risk has shifted from borrowers to lenders. As a result, it has become more difficult for anyone receiving income in a foreign currency to secure a loan for a UK property purchase.
A range of options
Coutts is one of the few lenders to offer a foreign currency mortgage solution. Our flexible approach allows us to meet the needs of borrowers who have one or multiple international income streams.
If you need to take out a loan against a UK property, we offer mortgages in four major currencies – euros, US dollars, Japanese yen and Swiss francs. In addition we offer mortgages secured against UK properties in sterling for clients who live outside the UK (not available in all jurisdictions).
If you would like to discuss your mortgage requirements with one of our expert advisers, please contact your private banker or Coutts 24 on 020 7957 2424.
As with all currency transactions fluctuations in values could result in higher repayments.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
For mortgage amounts over £1,000,000. Over-18S Only. Terms and Conditions apply. You may not be eligible for all mortgage solutions.
We will monitor the currency mortgage in sterling and, should the sterling equivalent loan to value exceed 107%, you have 14 days to repay the outstanding balance. If you fail to do this, or if the sterling equivalent exceeds 115%, we reserve the right to convert the loan to sterling.
A foreign currency mortgage lets you use your non-sterling income to finance a mortgage for a UK property. Recent regulatory changes have led to a number of providers withdrawing their products from the market. Coutts remains one of the few lenders ready to help clients looking to buy themselves somewhere to live or a property for investment.
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