A spate of lenders have halted foreign currency lending in recent weeks ahead of the Mortgage Credit Directive (MCD) implementation, which will require institutions to introduce customer safeguards to protect borrowers against fluctuations in exchange rates.
A foreign currency mortgage is defined in the MCD as a mortgage that is either in a currency other than that of the customer’s income or assets from which the loan is to be repaid, or in a currency that differs from that of the country where the customer is resident.
Simon Gammon, head of Knight Frank finance who is in favour of tighter regulation for foreign currency loans, said the risks of lending in this sector far outweigh the benefits.
“In my whole career I’ve met only a handful of people who’ve benefitted from foreign currency mortgages and saved money; the vast majority have lost money and some have lost properties off the back of them,” he said.
“Altogether I think it’s a good thing that there’s going to be less and less of these around.
“When the tide shifts in currency it can move very dramatically during just the course of a day. I think these loans are dangerous and unless you really know what you’re doing the risks aren’t worth it,” he added.
Market Harborough Building Society is one of a handful of lenders, including Santander and Barclays Wealth that has confirmed it will continue with foreign currency mortgages post-MCD. But, these lenders will only accept income in a foreign currency – they will not offer a mortgage in a currency other than sterling.
A spokesperson for the Market Harborough said: “We have seen a strong demand from these type of customers over the past two years as many professionals have increasingly international careers but want to maintain a foothold in the UK property market. We don’t see the demand for this type of product reducing and we intend to support our intermediary partners in providing suitable mortgage solutions for their clients’ needs.”
Simon Checkley, director at Private Finance, said those lenders which have withdrawn from providing to borrowers earning in a currency other than sterling had ‘reacted strongly’.
“Most lenders which have been active in this market have not withdrawn as they have already been applying a reasonable ‘haircut’ to the applicant’s income. Their stance will have an impact as they were among the few providing mortgages to expats,” he added.
However, Jonathan Harris, director at Anderson Harris, believes the market for foreign currency lending has become more diluted following the credit crunch.
“In the post-credit crunch and Mortgage Market Review climate, lenders look for safe and conservative lending practices and there is little room for the speculative nature of foreign currency products.
“The market for foreign currency mortgages has become increasingly limited after many borrowers got their fingers burnt due to currency fluctuations pre-credit crunch. The potential upside of benefiting from favourable currency movements was put into perspective with the spectre of borrowers ending up owing significantly more on their mortgages than they started out with, some with literally million pound loses,” Harris continued.
“Many lenders have already withdrawn from the market and I suspect that those remaining will soon follow as demand is minimal and the risks too great.”