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Swiss mortgage on French Property


veryworried
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Has anyone else suffered huge problems due to taking out a Swiss mortgage on a French property?  We're now in an uneviable position, and I wondered if this was a widespread problem in France where borrowers were simply not warned of the true risks, or advised to take out plans to cover the currency fluctuations. 
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As a percentage of the overall market, I'd have thought that the number of properties bought with non-Euro mortgages would be quite small, though not unknown - I suspect that quite a few UK-resident-owned French holiday homes were bought with sterling loans.

Any situation where you are earning in one currency and borrowing in another is bound to be fraught with currency exchange rate fluctuation risk: this kind of borrowing is not really considered a product for the novice.

I know of people who borrowed in Yen in the later 1980s/early 1990s and came out very well as the yen then depreciated significantly against european currencies, meaning the capital to repay dwindled. Those who borrowed in sterling before say 2005 will also have done reasonably well.

The original advantage of a Swiss Franc-denominated loan (and an attraction which which still continues) is that the interest rate payable is in general VERY low and stable: the problem is that the Swiss Franc has appreciated significantly against the Euro and sterling, and I believe now is being effectively capped vs the € to prevent it getting too high.

Your problem now is that the capital repayable expressed as £ or € has gone up, as have your interest payments once translated into £ or €.

The question to which we would all like the answer is this: which way will the Euro or £ exchange rate vs the Swiss Franc go over the next few years? If you think that eventually the Swiss Franc will fall back, then it might be best to hang on; if you think that it may appreciate further, then perhaps it might be best to reduce your exposure by paying it down and converting the rest into a Euro or £ loan; if it stays steady, then you are stuck with your current situation.

I believe that there were/are hedging products that you could have or could now purchase, but these would have added to your effective mortgage costs and reduced the attraction of the Swiss Franc mortgage.

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To answer your question, I don't imagine it's widespread because I

haven't heard of banks encouraging people to do this.  It's difficult to comment without knowing the circumstances, but if someone advised you to take a foreign-currency loan without giving some

very solid reasons, I would say you got bad advice.

If your income is in euros and you took a Swiss franc loan in the hope

of saving some interest, then it was a gamble.  Any "plan" to cover the

currency fluctuations would have been expensive: the probability is that it would have more or less wiped out the interest

savings.

A loan in Swiss francs would make sense if you had Swiss franc income to cover the repayments – but then I don't see why you would have a "huge problem."

PS: I've just seen Pickles' post, which says it all.  The only thing I would add is to emphasize the definite link between interest rates and forward exchange rates: the hedging products certainly exist, and they can be used to limit risk, but they will probably cost you money unless (a) you think you know better than the market, and (b) you are willing to bet on it.

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I suppose the question is why you took out a swiss mortgage in the first place. If you were working there, there would seem a sort of logic to it. If not, then I do not understand, I mean, I really do not understand.

As it is a  fact, known to us all, that interest rates rise and fall with little rhyme or reason, hence currency fluctuations. And are something that should always be taken into account in the first place, and just something we have to live with. So what else is the huge problem?

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[quote user="idun"]I suppose the question is why you took out a swiss mortgage in the first place. If you were working there, there would seem a sort of logic to it. If not, then I do not understand, I mean, I really do not understand.

As it is a  fact, known to us all, that interest rates rise and fall with little rhyme or reason, hence currency fluctuations. And are something that should always be taken into account in the first place, and just something we have to live with. So what else is the huge problem?[/quote]

Well, in the OP's defence, once upon a time, the financial system seemed all stable and hunky-dory, and under those circumstances the possibility of low interest rates via a Swiss Franc loan would have been very appealing ... The idea that there would be such a large swing against what was generally considered to be a relatively strong currency (the euro) was once considered by most commentators to be unlikely. Not that they would now admit such. Oh no, they knew all along that there were huge underlying problems. (BTW, I'm directing this at the market pundits, not posters on this site, some of whom have a good deal of useful knowledge and experience in these things).

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Don't men to be flip but if currency rates had worked in your favour instead of against I wonder if you would be posting under the username 'veryhappy' and proclaiming your good fortune, I suspect not.

Taking on a commitment or a debt in a currency other than that in which you earn your income or hold other resources to service it is a gamble and one which every single UK pensioner and saver has taken in choosing to move to France and in a sense then your complaint is in echoed by every single one of us who derive part or all of our income from the UK and in Sterling. If you failed to recognise the risk or to take it into consideration and mitigate against it then those are omissions on your part which you will have to live with. If you feel that you were let down or misled by whomever you took advice from, then that is a matter between you and them.

I am fortunate in having neither a mortgage nor debts however to hedge against currency fluctuations which could potentially compromise my income I converted a significant portion of my private pension to a Euro denominated QROPS so between that and my UK sterling pensions and savings at least I felt that I had an element of control and choice in deciding whether to draw down Euros from the QROPS or convert from sterling, whichever was the most advantageous on the day.

In these days of uncertainty about the Eurozone it's conceivable that I could come to regret that move but if I do I won't be here blaming anybody, I took what I believe was a well researched and calculated gamble and will have to live with it for better or worse.

Sorry if the above sounds harsh but I'm not sure what sort of responses you actually expected when you posted ?

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And we have done the opposite and moved back to the UK with only french income. And we understood what that implied, income could be great or lousy, but we'd have to get on with it.

We have always, in my defence [:D] had to deal with currency fluctuations during our time in France, what with our to'ing and fro'ing to the UK. And surely the fluctuations in the exchange rate between CHF/€ have been rather similar to those of the £/€ over the last few years?????

 

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It's the kind of mistake many people have made, so the OP is in good company.

J Lyons & Co Ltd (remember - the Lyons Teashops, and a host of other food and drink companies, and even the first UK computer, LEO?) went bust when it borrowed in Swiss Francs back in the 1970s. The exchange rate moved against sterling and the company could no longer afford to pay the interest. It was then bought cheaply by Allied Breweries and mismanaged into extinction.

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Thank you for all your responses.  My husband and I both earn in sterling.  We have never been gamblers - we are certainly not and never have been driven by greed and have always just wanted to be able to manage our finances.  Nothing more.  Simply, we had not expected that after 18 months are mortgage would have risen so very highly.  It is now 150% more than it was originally.  We had, obviously, taken the advice of a mortgage broker, and yes, it is completely our own fault, - as its been pointed out  -and we have not been very wise.   

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[quote user="veryworried"]Thank you for all your responses.  My husband and I both earn in sterling.  We have never been gamblers - we are certainly not and never have been driven by greed and have always just wanted to be able to manage our finances.  Nothing more.  Simply, we had not expected that after 18 months are mortgage would have risen so very highly.  It is now 150% more than it was originally.  We had, obviously, taken the advice of a mortgage broker, and yes, it is completely our own fault, - as its been pointed out  -and we have not been very wise.   [/quote]

18 months ago! Ye gods! OK then, you were VERY badly advised. Was the broker in France or the UK?

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We're nearly at the end of a 5 year fixed rate interest only mortgage, and yes, it was only 18 months after it started creeping up by the hundreds every month.  Yes, I think we were very badly advised, given the mortgage broker was fully aware of our limitations.  We have never been in a position to take risks.  Unfortunately he seems to have disappeared off the face of the earth, and his company or the one he worked for has gone into liquidation.  It was a French company based in Geneva.  Thank you Pickles for both your replies and also to others.
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You say hundreds each month, but hundreds of what, pounds or CHF?

In Switzerland as in France, a mortgage contract is a legal contract and if it said a fixed rate, then that is what it should have been and for the five years stated. I can understand you having to pay more if the chf has strengthened, but you must have expected that anyway.

Incidentally, what did your french notaire say about this swiss mortgage and what did they write on the paperwork when you bought? When we bought every last detail of our mortgage was on the paperwork. And when we sold our buyers needed a mortgage and we saw every last detail of them and their funding, which I really did not need to see.

 

If you think that you are victims of a con artist, then I think that you should be contacting the police in Geneva.

 

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[quote user="idun"]You say hundreds each month, but hundreds of what, pounds or CHF?[/quote]

Doesn't make a lot of difference at present: the rate for several years up to the end of 2007 basically loitered around 2.25 CHF to the £. It is currently around 1.5 CHF to the £, having flirted with 1.2 CHF to the pound earlier this year. In the light of the new info on timing given by the OP, I reckon the OP was sold a CHF loan towards the end of the period when it might have been reasonable to consider such a thing if one were happy with the risks - ie just before the whole system went a*** over t***. I'm not sure that one could say that it was a scam as such, so proving that it was ill-advised would be difficult, and futile especially if the company no longer exists. Not much that can be done other than to hope that the value of the property may have risen a bit to compensate, especially given that if the timing of the purchase was right, the Euro will have since gone up against the pound.

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[quote user="idun"]2007 Pickles? The OP said 18 months, so the earliest late 2009 if not 2010.[/quote]

Yes, that's what I thought at first - and in that case it would have been very badly advised, but then the OP wrote:

[quote user="veryworried"]We're nearly at the end of a 5 year fixed rate interest only mortgage,

and yes, it was only 18 months after it started creeping up by the

hundreds every month. [/quote]

which I take to mean that the loan was taken out in 2007 ...

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[quote user="Pickles"]In the light of the new info on timing given by the OP, I reckon the OP was sold a CHF loan towards the end of the period when it might have been reasonable to consider such a thing if one were happy with the risks…[/quote]

With respect, Pickles, I think you're being too kind to the OP's adviser.  At any time, if interest on CHF is lower than interest on another currency, it means that the market expects CHF to get more expensive against that currency.  It must be so; if it wasn't, then corporate treasurers everywhere would be scrambling to borrow CHF. 

Any decent financial adviser would know that and would make sure that his client understood it.  Of course, what "the market" predicts will not necessarily happen; but it's the best available indicator of the risk. 

All this discussion is too late to help the OP, unfortunately.  But maybe it will help some other borrower to avoid falling into the clutches of a so-called currency expert.

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[quote user="allanb"][quote user="Pickles"]In the light of the new info on timing given by the OP, I reckon the OP was sold a CHF loan towards the end of the period when it might have been reasonable to consider such a thing if one were happy with the risks…[/quote]

With respect, Pickles, I think you're being too kind to the OP's adviser. [/quote]

WHAT? ME? KIND TO A splutter splutter splutter cough cough "ADVISOR"?

Sorry, can't find the smiley for "peptic fit"

But yes, perhaps a tad too conciliatory ... that's why I used the word might, which could be construed as "what the heck was the advisor thinking?"

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[quote user="Pickles"]WHAT? ME? KIND TO A splutter splutter splutter cough cough "ADVISOR"? [/quote]

Sorry, I assumed you were naturally kind and just couldn't help it.

But I know how you feel.  I was once nice to a management consultant, and I worried about it for weeks afterwards.

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Thank you again, all, especially Pickles.  The cynic in me wonders if the business of the "Advisor" went into liquidation because of the current situation, and had jumped on the band wagon in 2007.  Why liquidation of the company?  Is there any reason apart from the current financial situation?  Advisor is not the right word.  As I've said before, we're not gamblers, naturally cautious people, but were not warned about the implications of this mortgage, and rather stupidly saw no reason to question his knowledge (knowlege, I know, is not the right word).  I'm hoping we can come to some arrangement with the bank as we have a steady income coming in, and my business is doing well right now.  Wish me luck, and I appreciate everyone's thoughts on this horrible situation.
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To be fair, warned or otherwise you must have surely realised that during the term of your mortgage which I am assuming is one or two decades either the Euro or the Swiss Franc was likely to move relative to the other and that this would have either a positive or negative effect on your day to day finances.

I am also assuming that when you took out the mortgage that it was favorable to do so in Swiss Francs.

By the end of the term it may have swung the other way, from the figures shown before it looks like it has been moving in the right direction for you for some time now.

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