Do you want to buy a property abroad? You’re not alone. Everyone buy a second home overseas each year, whether it’s as a holiday home, rental investment or somewhere to retire or relocate to – or indeed a combination of all three.

The reality is, though, that many more people would love to take the plunge but don’t know where to start. After all, it can be intimidating transferring large sums of money into another currency and committing to a foreign mortgage.

Here we’ll explain what foreign currency mortgage is and how to use it effectively.

What is Foreign currency mortgage?

A foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident. Foreign currency mortgages can be used to finance both personal mortgages and corporate mortgages. The interest rate charged on a Foreign currency mortgage is based on the interest rates applicable to the currency in which the mortgage is denominated and not the interest rates applicable to the borrower’s own domestic currency. Therefore, a Foreign currency mortgage should only be considered when the interest rate on the foreign currency is significantly lower than the borrower can obtain on a mortgage taken out in his or her domestic currency.

Borrowers should bear in mind that ultimately they have a liability to repay the mortgage in another currency and currency exchange rates constantly change. This means that if the borrower’s domestic currency was to strengthen against the currency in which the mortgage is denominated, then it would cost the borrower less in domestic currency to fully repay the mortgage. Therefore, in effect, the borrower makes a capital saving. Conversely, if the exchange rate of borrower’s domestic currency were to weaken against the currency in which the mortgage is denominated, then it would cost the borrower more in their domestic currency to repay the mortgage. Therefore, the borrower makes a capital loss.

When the value of the mortgage is large, it may be possible to reduce or limit the risk in the exchange exposure by hedging.

Does why you buy make a difference?

It’s important to decide exactly what you want the property for and then make the best buying decision based on that information. Do you want a mortgage or are you a cash buyer? Do you know what your budget will get you or what extras you could get by stretching it a bit? It’s a big investment, so doing your due diligence and researching the markets properly is a crucial first step.

Before Entering into it Know the risks :

1. Exchange rate changes

Currency fluctuations can be the one of the biggest factors to think about when buying abroad. Even a small change in the exchange rate can have a big impact on the value of the property you’re buying and make it, or your foreign currency mortgage payments, quickly unaffordable.

2. Hidden costs

As with everything in life, there are costs that may not be immediately obvious so it’s important to research thoroughly – have you considered everyone and everything, from the lawyer to the broker? And of course, you should check the tax you may be liable for – both in your Country and the country you’re buying in.

3. People and paperwork

Taking independent advice from the right people at the right stages will help you avoid nasty surprises later in the process, such as making sure your paperwork is all in order and having the necessary licences and permits for any business elements, and the right planning consents if you’re building a new property.

4. Balance your debt against your risk

Leveraging the mortgage on your Country home to buy overseas is a risky proposition. If, worst case scenario, something does go wrong with your new property abroad and it leaves you in debt, that debt could put your home at risk. We’d never recommend it but if it’s your only option, be sure anakyze the other markets and Investments.

Conclusion:

The foreign exchange market is in constant flux, which means the value of each currency is constantly changing in relation to all the others. No one can predict how much currency values will go up or down, or when. Lots of things can affect it, from political upheaval (think Brexit or Trump’s election for two prime examples from recent years) to the wider impact of economic or even climate change. Most of the time when you’re buying holiday currency you’ll just do a quick exchange at the bank or post office, but when the amount you’re exchanging increases significantly you need to take a more practical approach and plan for currency risk.