In an age where investors are spending increasing amounts of time managing their investments, it is perhaps strange that the management of liabilities is an area that remains frequently overlooked.
A pound is a pound whether it has a plus or minus sign in front of it and it should be professionally and skillfully managed whether it is an investment or a debt.
The objectives of the multi-currency debt management programme and currency mortgage are:
- To reduce the size of your debt by borrowing in currencies which fall in value against Sterling.
- To reduce the cost of servicing debt by borrowing in currencies which have a lower interest rate than Sterling.
AAG works in partnership with the leading specialist companies to ally the potential of this dynamic market with a means of profiting from the management of debt. For UK clients, the combined benefits of debt reduction and cumulative interest savings since 1988 are now large enough not only to fully pay off any loans taken out in 1988 but also to have generated a considerable cash surplus. Clearly, any product that demonstrates a proven ability to turn a liability into an asset should be taken seriously. currency mortgage highlights:
Criteria for a Currency Mortgage
- Minimum loan size of £500,000
- Maximum loan to value of 65%
- Minimum income of £100,000 pa or equivalent
Borrowing in Foreign Currencies
Interest Savings: There are significant variations in the interest rates applicable to loans denominated in different world currencies. For instance, over the past twenty years, the costs of servicing loans denominated in Swiss Francs and Japanese Yen have been some 40% to 75% lower than those applicable to loans in Sterling. The cash flow benefits of compounding such savings over two decades are clearly apparent to a corporation or individual.
Capital Reduction of Debt: Debt reduction may also be considerable if the loan is denominated in currencies which then depreciate against Sterling. All major currencies have fluctuated against one another over the years, thereby generating opportunities for debt reduction.
Single Currency Loans
The perils of single foreign currency loans
In recent years, many borrowers who adopted a single foreign currency loan, without the ability to switch into other currencies, have experienced a sizeable increase in their debt. In the 1980’s and 1990’s, this fate befell many UK borrowers who looked to escape double digit interest rates by taking out low cost foreign currency loans without adequately considering the exchange rate risks. Many such borrowers suffered heavy losses caused by the weakening of Sterling against other currencies. This was particularly apparent during Sterling’s withdrawal from the Exchange Rate Mechanism in 1992.
Such events clearly demonstrate the dangers of being locked into inflexible lending arrangements. It is our opinion that single foreign currency loans are only justifiable if the borrower has a source of income or capital in the same foreign currency. Even in this context one must consider the implications of adverse fluctuations during the term of the loan if the banks security is valued in Sterling (i.e. a UK property).
Why a Multi Currency Loan
Effective risk management of a multi-currency loan facility helps to iron out the extreme peaks and troughs associated with major currency cycles, so as to make the risk/reward ratio more acceptable to borrowers.
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