Multi-currency mortgages in JPY Yen, what are
the risks and how do they work?
The following is a brief description of how multi-currency mortgages work in an attempt to answer the mystique that may, or may not surround them.
Generally, this type of product has only been available to wealthy individuals in the know and offered by selective UK brokers such as Savills or Cluttons, usually for loans in excess of 500k.
How it works in laymans terms:
Let's assume that you take out a loan in Japan Yen (JPY) and borrow 100,000 Euros at a rate of 125 yen to Euro you would be borrowing 12,500,00 Yen, this is the mortgaged amount. The loan is in Yen and the lender wants their loan repaid in Yen but you pay the monthly mortgage in Euros from your regular day to day bank account.
Note: The above is an example using the Euro but a GBP or Dollar loan works in exactly the same way.
As an example, if the monthly Yen repayment was 25,000 Yen a month you would be paying 200 Euros a month (using the 125 formula). Now, if the Yen weaked against the Euro it would reduce your Euro monthly payment. Therefore, you could carry on paying 200 Euros a month and thus pay off the principle capital borrowed sooner, or pay a reduced monthly mortgage.
Likewise, if the Yen got stronger your monthly mortgage payments could increase along with the principle sum advanced and that's why you can invest in insurance protection to avoid this. Please feel free to contact us for an illustration.
What are the Benefits of a Multi-currency Mortgage?
First and foremost you will be paying lower monthly mortgage. This is because the Japan Bank base rate is only 0.1% (early 2009) and has historically hovered around Zero for many years. Therefore, as with all lenders the rate is fixed at a percentage above UK base or Euribor rate.
European, US and UK loans may be at reasonable rates now but will it last? remember it was only last year that they were 5% and back in the nineties under the control of Norman Lamont they hit 15%. We all recognise that they will rise again as the Global economy improves. However, even at it's highest in recent years the Japan Base rate was only 0.5%.
The table below shows the interest rates in Japan dating back to 1995:
| december 2008 | 0.100 % |
| october 2008 | 0.300 % |
| february 2007 | 0.500 % |
| july 2006 | 0.250 % |
| march 2001 | 0.000 % |
| march 2001 | 0.150 % |
| august 2000 | 0.250 % |
| february 1999 | 0.000 % |
| sept 1998 | 0.250 % |
| sept 1995 | 0.500 % |
Secondly, by taking out a multi-currency mortgage you can benefit from using the services of a multi-currency manager who's only duty is to save you money and constantly strive to reduce the principle mortgage sum advanced. They do this by switching your loan to another weakening currency such as the US Dollar, Swiss Franc, GBP etc. The objective? to reduce the principal sum advanced. Please take a look at the following:
Loan reduction example, a €400,000 loan is converted into JPY Yen at 125. This produces a 50 million JPY Yen loan. If the Euro strengthens to 137 JPY Yen, when the loan is converted back into Euros it has been reduced to €360,000...a saving of 40,000 Euros.
They are inspired to achieve since they only receive a commission on any savings made.
What, are the risks of a Multi-currency mortgage?
Only one! You could end up owing more than the priciple sum borrowed. Let's say that exchange rates went against you (using the above 400k loan example) if the Euro weakened to 112 you could in fact end up owing 440k Euros.
This is why you can protect yourself by taking out insurance for a modest fee to ensure that YOU NEVER OWE MORE THAN THE PRINCIPLE SUM ADVANCED. It's a win win scenario. You can benefit by reducing the debt when exchange rates work in your favour, while at the same time insuring agains debt increase.
How does Currency Insurance work?
Currency Insurance can help give you peace of mind with the reassurance of knowing your loan is protected from currency conversion loss.
You pay a premium for the cover you need. If the exchange rate is worse than your Currency Insurance, your loan will be protected from a currency conversion loss.
If by the maturity date the exchange rate has moved to your advantage, the insurance doesn't apply. You can then benefit from taking the current exchange rate.
Currency Insurance premiums are quoted depending on a number of factors, such as the amount of time until the option matures and the volatility of the currencies insured. Contact us for a quotation and total peace of mind.
