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What is a Foreign Currency Mortgage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 October 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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A foreign currency mortgage is a type of mortgage obligation that allows the debtor to tender payments in a currency other than the one used in the nation in which the borrower resides. Mortgages of this type are often used to arrange the purchase of commercial real estate, but may also utilized to purchase residential property. The terms and conditions related to this type of mortgage include provisions that help establish how the rate of exchange is factored into the application of interest. Often, this approach is used when the borrower will receive significant financial benefits from this type of mortgage agreement.

There are two areas in which the borrower may find that a foreign currency mortgage may save money over the duration of the loan agreement. One has to do with the rate of exchange between the domestic currency and the currency that is used to repay the balance due. As long as the currency used to pay the loan is stronger than the domestic currency, this approach provides a limited amount of savings for the property owner. This does represent some degree of risk, since the exchange rate between two currencies could change at any time. In the event that the domestic currency were to strengthen against the foreign currency specified for repayment in the contract terms, the borrower would actually pay more over the life of the mortgage.

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Another area in which a foreign currency mortgage may yield savings is the rate of interest applied to the loan. Typically, the terms and conditions will call for utilizing interest rates associated with the currency used to repay the loan and not the rates applied to the domestic currency. This means that if the prevailing interest rate for the foreign currency is lower than the rate for the domestic currency, going with a fixed rate for the duration of the contract may allow the buyer to save a great deal of money over the life of the loan. Going with a floating or variable rate may be somewhat more risky, since there is always the chance that the rate would rise above the domestic rate, a state of events that would effectively offset the benefits gained from this type of mortgage arrangement.

Managed currency mortgages like the foreign currency mortgage do sometimes allow buyers to engage in hedging, in that the mortgage can be closely managed and switched form one currency to another from time to time. It is not unusual for companies that use this approach to hire a currency manager that is experienced with hedge funds to manage this process, making it possible to maximize the savings generated over the life of the mortgage. Since some nations place restrictions on who can apply for a foreign currency mortgage and what terms and conditions may be included in the mortgage arrangement, the aid of professionals to draft, execute, and manage the mortgage is often in the best interests of the buyer.

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