Euro mortgage

Posted on the forum by Gavin. (View the full forum thread)

My trade is Foreign Currency risk management. I used to get asked on a surprising number of occasions by financial directors of our clients if it was possible to borrow money in Japanese Yen to fund their latest ventures. Why? Because JPY interest rates are the lowest in the western world, base rate being 0.25%

Of course it is possible to borrow in a currency that is not native to your business.

Additionally of course you suddenly assume a massive foreign exchange exposure between GBP and JPY.

Example:

  1. You need to borrow GBP 100,000.00 for new machinery for a factory.
  2. You borrow JPY 20,100,000 paying 0.3% excluding credit margin, and convert it to sterling at today's rate of 201.00 to the pound giving you your GBP 100,000.00.
  3. Then in a years time you need to repay JPY 20,100,000 plus interest meaning a total of JPY 20,160,300.
  4. So from GBP you need to find JPY 20,160,300. If you are "lucky" then the GBP/JPY rate of exchange will not have moved over 12 months. If this is the case then you have indeed paid a very low interest cost in comparison with what is available in the UK and you repay GBP 100,300.00 meaning you achieved borrowing costs of 0.3%, well done.
  5. If you are "very fortunate indeed" the GBP/JPY will have risen to say 215.00 and then this will cost you GBP 93,768.84 to repay the loan, less notional than you borrowed!
  6. If you are "less fortunate" the GBP/JPY rate will have fallen to 180.00 and then this will cost you GBP 112,001.67 to repay the loan, a wapping 'interest' payment of 12%.

The borrower is doing nothing but pure speculation, by creating an exposure in a currency/asset that he would not normally use in day to day business.

Is it possible to protect yourself against currency movement? Yes of course. If you purchase JPY today but forward dated for delivery in one years time the rate received will be approximately 192.00, meaning you would need to find GBP 105,000 to repay the loan, i.e. the same economic cost of borrowing GBP 100,000 for 1 year. The forward rates offered by banks simply mean the bank buy the JPY today and hold on deposit and calculate the economic cost of forgoing the normal return on GBP in the UK.

There is no way round this. It would be the same for the Euro against GBP. It smacks of complete desparation that this alternative is being considered as it would fool the financially illiterate masses even further in todays obsessed debt culture.

The only cure for hard drugs is cold turkey. I have worked in currency management for a number of years and I am continually surprised by the money illusion suffered by many in high positions.

I used to have a customer who ran the accounts of a large famous name brand who used to do just this type of speculation every year. He had gotten away with it due to low currency fluctuation. One day he will be found out. The problem is that his company rules made no restriction because nothing had gone wrong to date. Amazing. Its Enron with currencies.

If this Euro mortgage catches on, don't touch it with a bargepole unless you are paid in Euros.

See also

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