Loans in a foreign currency: our 5 tips

Although fluctuations in exchange rates may encourage some cross-border workers to take out a loan in a foreign currency, the fact that the Swiss franc is a strong currency does not mean that such a financial transaction is without risk. Here are five tips to help you reduce uncertainty and manage your foreign currency loan more effectively.

#1 Taking currency risk into account

The first thing that comes to mind when taking out a loan in a foreign currency is, of course, the exchange rate risk between the two currencies involved. Whilst the lender is required to inform the borrower of this, it is nonetheless important for cross-border workers to anticipate potential fluctuations.

Over the last 10 years, the EUR/CHF exchange rate has fluctuated between a high of 1.50 and a low of 0.84… It is therefore vital to estimate as accurately as possible (and across several investment scenarios) the impact that exchange rate fluctuations will have on the cost of your monthly repayments and the interest you will have to pay, so that you do not find yourself in difficulty in the event of an adverse change in the exchange rate.

The best course of action here is to ask the lending institution for loan risk simulation documents, showing the financial implications of an unfavourable exchange rate movement of 10%, 20% or even more.

Please note: In France, the Prudential Supervision and Resolution Authority (ACPR, Banque de France) has, since 2012, emphasised the importance of transparency and clear communication on the part of lenders, particularly in relation to foreign currency loans worth more than €75,000.

#2 Understanding your borrower profile

To secure a loan and convince a foreign lender, it is more important than ever to provide a substantial deposit. Knowing your financial circumstances will therefore help you to determine this amount.

In addition, other factors affect your borrowing profile, such as your borrowing capacity, the term of the loan you are seeking, and the project you wish to finance with this loan. All these criteria should be taken into account in your calculations.

As a reminder, it is generally accepted that your maximum debt-to-income ratio should not exceed 30% of your total income. This estimate will help you work out the amount of the loan you are eligible for.

When assessing your income, the following factors are taken into account:

• salaries;
• pensions;
• rent received;
• pensions. 

Once again, as with currency risk, anticipating changes in your sources of income and expenditure will make you appear more credible to your bank, whilst strengthening the viability of your project.

#3 Find out what’s on offer

Lenders offer a range of interest rates for customers to repay their loans. These include fixed rates, variable (or adjustable) rates, capped rates and more. It’s up to you to choose the option that best suits your needs. To do this, you need to assess the level of risk you’re prepared to take on over the coming years, based on your available cash flow.

It should also be noted that cross-border workers wishing to take out a mortgage may be eligible for an interest-free loan (PTZ) subject to certain conditions:

• buying a property for the first time (being a first-time buyer);
• buy new;
• remain below a certain income threshold, depending on the number of people in the household and the region where the property is purchased.

#4 Taking out the right mortgage insurance

Taking out a loan requires several forms of financial security. First and foremost, there is the bank guarantee, which may take the form of:

• a surety company;
• a joint guarantee;
• a mortgage;
• a lender’s privilege (PPD).

Please note: The cost of each of these solutions can vary significantly, so it is advisable to find out in advance which option is most suitable for your borrowing profile and to include this amount in your overall budget.

In addition, mortgage insurance is required in the event of unforeseen circumstances (accident, illness, death). As this is a requirement imposed by all banks, this insurance can be provided either as a group policy or as an individual policy.

An individual policy allows the borrower to tailor the terms to their specific circumstances, thereby avoiding unnecessary costs. It is offered by insurance companies.

For its part, group insurance is usually included in the banks’ own offers, which is why taking out such cover gives the customer additional leverage when negotiating the loan. However, the cover provided by a group policy is less customisable and may involve unnecessary costs.

Before making your decision, you should therefore take into account your budget constraints, your room for negotiation, any exclusions in the policy, as well as the cost factors affecting your insurance policy (health status, the policyholder’s age, etc.).

#5 Planning ahead for the project

The term of a foreign currency loan will have a significant impact on the total amount borrowed. Whilst the term for a mortgage typically ranges from 20 to 25 years, you may wish to shorten this period. However, factors such as the repayment period and the interest rate must be taken into account before making any decision…

To keep you informed, the lender must provide you annually with a document comparing the outstanding balance, the remaining repayment period and changes in the exchange rate since the date the contract was signed.

As economic conditions can change, do not hesitate, if necessary (and if possible), to renegotiate your loan rate or even to refinance your loan. The same applies to mortgage insurance: for example, the French law of 26 July 2014 allows you to switch insurance providers up to one year after taking out the policy, provided that the cover is the same or better.
The factors affecting foreign currency loans are numerous and complex. That is why b-sharpe supports you in managing your foreign currency loan.