In this final atricle of the series I will show how a FX rate change can generate wealth for the borrower in very short time. Let’s use a $600,000 house purchase; however instead of borrowing in yen, we’ll keep the loan denominated in NZD to start with and switch to yen two weeks later after the same FX rate change which got us in trouble in part 2.
By converting to yen after the drop you have reduced your downside risk, i.e. if then yen drops further you will only have top up on the difference from 60 rather than 80.
Now let’s add an extra twist, after falling from 80 to 60, the exchange rate recovers back to 70 and you take your chance and convert back to NZD. What just happened? Check out the extra column on the table below.
Congratulations, you have just carved $60,000 or 1/6 off your debt without paying back a cent of it yourself. Let’s be smart about this however, if you wish to trade large amounts of money on margin to make money on FX movements, open a margin account and day-trade with that. Do not look to trade FX with your life savings and family home.
It should be clear from the examples that an exchange rate change can either benefit or hurt you and that proper risk management is important when taking on international loan financing. In a stable economy, sudden swings of the magnitude described above are rare. However during the months following the Lehman Brothers collapse in 2008, the NZD/JPY rate went from over 85 to 47, a drop of 45%.
So you see this can go both ways, I remember talking to several lenders after Lehman Brothers crashed as they foreclosed on dozens of internationally financed homes, wiping out the savings of people who had invested when the yen was very low. In many cases the investor still owed money afterwards.
However, some savvy investors who had kept their loans in the local asset currency were able to convert to yen at the right time and carve huge amounts off their mortgages.
From talking to people who came out on both sides of the bargain in 2008-2009 I feel that a cross-currency mortgage can be a great method fast track repayment of a property loan, however you should not use it as a means to borrow larger amounts than you normally would be able to afford repaying. Also you must be willing to pay attention to foreign currency values, as they will move much quicker and further than creeping property value trends.
There is risk involved but if you’re willing to run the numbers, watch FX trends and actively manage your risk then an international real estate mortgage could be the investment accelerator you’ve been looking for.