Foreign currency mortgages: Dream turns into nightmare for overseas investors

5th July 2011

Back in 2007 and 2008 Swiss franc mortgages were sold to investors buying properties in Cyprus. But the Greek debt crisis has sent repayments on this type of mortgage soaring and many borrowers unable to meet monthly repayments.

If you take out a foreign currency mortgage your mortgage repayments and the loan value in Sterling change with currency movements. But if rates don't work in your favour the amount you owe can spiral very quickly. Investors in Cyprus have found this out the hard way.

Swiss franc mortgages were popular with buyers in Cyprus a few years ago as the interest rate was much lower than that available in the Cyprus pound (Cyprus joined the euro in January 2008). A mortgage in Cyprus pounds would have been at a rate of about 8% but Swiss franc loans had rates of about 4%.

The trouble is, the past three years has seen the Swiss franc nearly double in value. At the same time property prices in Cyprus have collapsed. It's virtually impossible to sell and those homeowners who do try find the sale price is not enough to pay off their mortgage.

This weekend The Times (paywall) highlighted some borrowers who have been caught out by foreign currency mortgages.

One couple had bought an apartment in 2008 and took out a Swiss franc mortgage with Alpha Bank Cyprus. The deal involved not paying anything for three years and after that repayments were expected to be about £680 a month. However, exchange rate movements mean their monthly repayments are actually £1,100.

Meanwhile falling property prices put the couple in negative equity which makes switching mortgages or selling up very difficult.

The Swiss franc has appreciated against other currencies since 2007. In July 2007 £1 was worth SwFr2.49 but now it's worth just SwFr1.35. It's likely to keep going up too.

When the Swiss Franc stood at 2.49 to the pound, you'd need £400 to cover a SwFr1,000 mortgage payment. But with the Swiss Franc at 1.35 to the pound, the payment jumps to about £740.

When the Swiss Franc was at 2.50 to the pound a SwFr100,000 mortgage would be worth about £40,000 in Sterling. But the currency's appreciation means the sterling value is now closer to £74,100 so many borrowers have seen the capital they owe rise considerably.

Experts generally advise against taking out mortgages in other currencies other than the currency you are buying the property in. Another tip is to always seek specialist advice from independent solicitors and surveyors before buying.

Read Mindful Money's econmist Shaun Richards' blog on the Swiss franc here.

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