This article explains the benefits and risks of an international mortgage.
What is an international mortgage?
An international mortgage, also known as a cross-currency loan, means buying an asset (typically a house) in one country with money borrowed in another. Buyers use international mortgages to take advantage of low interest rates in countries other than that where they live and save on interest rates. One common example is that were a person living in Japan borrows in yen at near-zero interest rate to buy a house in a western country with higher rates, such as New Zealand or Australia where interest rates are normally 6% or more.
Who is eligible for a foreign currency home loan?
For individual investors you must normally reside in the country where you are borrowing at a low interest rate. In Europe this may not always be the case however a bank will not lend unless it has sufficient security for the loan.
What savings can an international mortgage can bring to the borrower?
I will use a simple example of buying a house in New Zealand. Lets assume the house costs $300,000, NZ interest rate is 7%, and the Japanese interest rate is 2% (typically a bank will charge base +2%). Below are numbers I calculated with a simple loan calculator, there are tons of these online, just search on Google and run your own numbers (I recommend http://www.mortgage-calc.com/)
- Cost: $300,000
- Deposit: 20% ($60,000)
- Loan: $240,000
- Loan period: 30 years
- Exchange Rate: $1NZD : ¥80JPY
NZ Bank Scenario
- Rate: 7%
- Total interest paid: $334,821.36
Japan Bank Scenario
- Rate: 2%
- Total interest paid: $79,351.22
If you’re paying a fixed amount each month, having the loan in yen will allow you to repay it much, much faster than in dollars. You can see why an international mortgage can be popular with investors!
At this point you could be forgiven for wondering why every homeowner in the world doesn’t simply finance their property in yen. The answer to this is that fluctuations in the foreign exchange rate come into play and greatly increase the risk of foreign property lending to all parties. I explain in more detail what this means in part 2.