A foreign currency mortgage is a mortgage that should be repaid in a currency which is not the currency of the home country of the borrower, where the borrower is a resident.

Foreign currency mortgages are used to fund:

• Personal mortgage
• Corporate mortgages.

The interest rate applicable on the foreign currency mortgage is applicable with respect to the interest rates which are worked out on the basis of the currency in which the mortgage is being denominated. If you are going to borrow Euro by being a citizen of US, the interest rates will be applicable in Euro and not in the USD.

The money you get will also be in the Euro and not in your domestic currency. You might or might not convert the currency to your domestic currency based on your individual requirement.

Before considering on borrowing a foreign currency you need to make sure that the interest rates applicable for the foreign currency is less when compared in terms of the interest rate applicable for your domestic currency.

You are borrowing a foreign currency to save on the interest that you will be paying for it, but if the interest rates applicable are more than your domestic currency you are making no better deal and it makes no sense to be dealing with such a transaction.

Borrowers should always remember that if due to sudden fluctuations in the exchange rates, if the value of the foreign currency borrowed goes drastically up, they are still supposed to be repaying it as they agreed in the loan agreement.

In such situations, you might be paying more money from your domestic currency, where you will be converting your domestic currency to the applicable foreign currency in which you are supposed to repay; however, when your domestic currency gains better exchange rate versus the borrowed currency you will be saving a lot in terms of the capital.

Whether you make a capital loss or a capital gain is dependent on the applicable fluctuation in the exchange rates of the currencies involved.
In cases where the value of the mortgage is huge, it will be possible for you to limit the risk in the exchange rate fluctuation by means of hedging.

In cases of Managed currency mortgages there will be a slight reduction in the risk factor associated with exchange rate fluctuation.

In a managed currency mortgage, the borrower will work with a professional currency manager by providing him with limited power of attorney. The currency manager will watch the exchange rates and he will switch the debt of the borrower in and out of the foreign currency with respect to the base currency in a beneficial way.

A professional and experienced currency manager will be skilled in moving the borrower’s debt into a currency which will subsequently decline in value versus the base currency.

The manager will then switch the loan back again to the base currency or in to some other another currency which will be weakening to achieve a better exchange rate for the domestic currency which should be converted.

This will reduce the overall value of the loan. Also, the currency manager will choose the currencies which have a lower interest rate than the base currency, thereby saving the interest rates for the borrower.

However, there are risks in such types of mortgages if there are going to be drastic fluctuations in the currency markets.
When a borrower deals he will just pay the interest and will be highly under the influence of exchange rate fluctuation and probable increase in the value of the debt.

If there is a currency manager for the mortgage he will work towards interest rate savings and he will target towards bringing down the value of the debt.