FX Loans and Brexit: How do they combine?

Posted on 14/07/2016 · Posted in Europe, FX Loans in Europe, News

Brexit has created a torrent of reactions across Europe. The economic effects due to the result of the referendum, have deeply affected the value of the pound in the currency market. The UK currency has undergone a major depreciation in recent weeks. The pound hit a new 31-year low against the US dollar, a minimum of 2.5 years against the euro and a minimum of 3.5 years versus the yen. GBP / USD dropped below 1.3100 and is currently trading at $ 1.3058. Against the euro has also suffered a blow to reach 1,167 euros, its lowest level since 2013. But what does this mean or result for those affected by multi-currency mortgages underwritten in pounds?

FX Loans is a bank product that has generated controversy. The user can change at any time the currency in which they want their mortgage to be calculated with. The most frequent currencies that have been used are the Japanese yen, Swiss francs and Esterlin Pound.

Many of them were subscribed in yen and Swiss francs between 2007 and 2008. In 2011 some customers switched to pounds in search of a better currency. At the time of subscription, as reflected in a report by the Association of Financial Users (ASUFIN), 98% of these mortgages (FX Loans) were underwritten in those first two currencies. Now, with the modification of the currency of some customers, the number of multicurrency mortgages in pounds would be around 1.8%, approximately around 1.280 FX Loans.

 

Evolución de la cotización de divisas
                                                         Evolution of the exchange rate – ASUFIN/E.Mestre
FX Loans have a high risk and volatility. This bank consumers of this product have suffered, according to ASUFIN, losses of 200,000 euros, but some may recover part of the decline in the price of the pound against the euro.

 

Whoever hired, just a year ago, FX Loans and signed it in pounds, will be benefited by the devaluation of the currency by a 17%. The amount of your mortgage will be identical but the exchange rate between euro-pound will benefit in the mentioned percentage. But this moment that may seem profitable, has arrived after years of loses. These products have such a high risk that in times of crisis like the past years, the bank users most probably lost hundreds of thousands of euros. A person who contracted FX Loans, for a value of 200,000 euros in 2008, changed yen and pounds in 2011 would have payed 37.232,64 € more in fees compared to a client who’s loan was in euros, based on the Euribor and not in Libor.

 

Evolución de la simulación de una hipoteca multidivisa
                                      Evolución de la simulación de una hipoteca multidivisa– ASUFIN/E.Mestre

Thus, by comparing the debt at the time of sale in either cases, the difference would be that whoever had formalized their mortgage in euros would have been able to amortize 87.677,66 € more, than someone whom applied a different currency as FX Loans does. In total, summing up the overpaid in paid fees paid, a customer with FX Loans suffered a total loss of € 125,426,12. Without Brexit the lost would have been worse for those whose FX Loans is in pounds – 145.000 € in total – if there hand´t been a depreciation of the pound.