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| How Some Investors Are Paying Off Their Mortgages Without Lifting A Finger |
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| Majority of property investors prefer to hold their investments over medium term. A vast majority of them are relying on property prices to continue to go up. That way they can sell off a part of portfolio and pay off the outstanding mortgage with profits. Does this scenario sound familiar? What if property prices stall for a few years? How do you plan to pay off the debt then? In other words, is there a plan B? Some investors are beginning to look into alternative ways of debt reduction, like foreign currency mortgages. In simplistic terms, they switch their loan between various major currencies with the aim of reducing both the value of the debt and the interest paid on that debt. Let’s assume that an investor has a UK based property portfolio with an outstanding mortgage of £1 million. Let’s also assume that the rate of interest paid on the mortgage is 6% p.a. giving an annual interest bill of £60,000. There are many countries around the world where interest rates are lower than UK. For example, the one-year market rates for some of the leading world economies are (as of 03 Sept 2007): Sterling (£): 6.59% US ($): 5.26% Canada ($): 5.01% Euro (€): 4.78% Swiss Fr: 2.98% Yen (Y): 1.1% Suppose we decide to switch our Sterling loan to Yen at the exchange rate of 226.00 (i.e. £1 buys Y226 on the day). This gives rise to a Yen loan of Y0.226bn with interest rates around 1.1%. Now, let’s say the Yen weakens by 5% against Sterling. This makes the new exchange rate Y237.3:£1. At this point, the loan is transferred back into sterling. The 5% movement results in the debt reducing from £1M to £950,000 or by £50,000(as 5% of £1M is 50K). |
While the debt was held in Yen, the interest rates paid were not 6% but only 1.1%. A few such favourable movements can reduce the debt considerably. But the question is: how do you switch your mortgage from a UK bank to a Japanese lender? The answer is: You do not. How to do it: Let’s assume that you have a few thousand pounds sitting in your savings account. Let’s say that your risk capital is £50K and you are happy to put this sum into a currency trading account. The fund managers will move the money all over the place with the objective of reducing your mortgage debt by 5% per year. If this works well then this should pay off your £1M mortgage in about 14 years. Advantages of this strategy
But there are some disadvantages too
Can you do it yourselves? |
Ideally, you should use fund managers who only get paid if you make a profit. The key to success is to be in the right (or weakening) currencies at the right time. That is yet another reason why you should use expertise rather than choosing the DIY route. Is this route for you? It really depends on your risk tolerance level. It is certainly not for the faint-hearted or those who cannot afford to lose their risk capital. There are plenty of upsides but you should always consider the downsides. It is probably best to start small and increase your capital exposure with time. So to summarise, here is the overall process
You can do whatever you want with this money. You can pay off the mortgage debt or take an exotic holiday – it’s your money and your choice. |
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