Repaying a loan in CHF and currency exchange? What you need to know!

How does a foreign currency loan work?

To fully grasp the issue, it is important to understand how a foreign currency loan works.
A foreign currency loan is a loan in Swiss francs offered to individuals with income from Swiss sources in CHF who wish to invest in a property that is not priced in Swiss francs. These loans are offered either by Swiss banks or by European banks, notably certain French banks in the Franco-Swiss border region (Crédit Agricole, Crédit Mutuel, Caisse d’épargne, Banque Populaire des Alpes).

When the mortgage is finalised, the bank arranges the financing based on an exchange rate: the amount in euros required to complete the foreign-currency mortgage is then converted into Swiss francs, and it is on this basis that the repayment schedule is drawn up, resulting in repayments in CHF for the customer.

When the property is sold, the reverse process takes place: the sale proceeds, in euros, must be converted into Swiss francs in order to repay the mortgage, which is denominated in Swiss francs.

How is an exchange rate determined?

Another mechanism that is important to understand in order to grasp the issues surrounding the repayment of a CHF loan is how exchange rates are set. The exchange rates offered by financial institutions and currency brokers are based on reference rates, known as interbank exchange rates. These interbank exchange rates can fluctuate at any moment for each currency pair, and each broker or bank adds its own margin to determine the exchange rates they offer their customers.

This margin is a business decision, a choice. It is usually expressed as a percentage; the higher the percentage, the more commission the intermediary takes, and the less favourable the rate is for the customer.

These are substantial sums, which call for vigilance regarding the exchange rate applied

When it comes to repaying a mortgage, the sums involved are generally substantial, and it is not uncommon for amounts running into several hundred thousand euros to be converted into Swiss francs.

You will appreciate, then, that the exchange rate used for the conversion is crucial, and that even a small fluctuation can have a significant impact on a large sum.

At many financial intermediaries (including banks), the higher the amount, the lower the margin should, in principle, be, in stages. Unfortunately, this is not always the case, and some institutions charge their retail customers high margins.

To put it simply, ask your broker whether the exchange rate applied to a sum of CHF 5,000 is the same as the rate applied to the amount you wish to exchange to repay your loan. If the answer is yes, then there is a problem and there is likely a risk that you will be charged a very high rate.

An example to help you understand the impact of the exchange rate margin

A retail customer needs to repay CHF 200,000 to their bank to settle their foreign currency loan. They must therefore convert the corresponding amount into euros. We have simulated several repayment amounts based on the margin applied by the bank.

The market-determined reference exchange rate for EUR/CHF is 1.12377

• Case 1: the bank applies a margin of 1.5%. The exchange rate offered is therefore: 1.12377 / (1+1.5%) = 1.12377 / 1.015 = 1.10716
  So, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.10716 = €180,642.36
• Case 2: the bank applies a margin of 0.75%. The exchange rate offered is therefore: 1.12377 / 1.0075 = 1.115404
  So, to receive 200,000 Swiss francs, you would need to pay 200,000 / 1.115404 = €179,307.22
• Case 3: The financial intermediary applies a margin of 0.50%. The proposed exchange rate is therefore: 1.12377 / 1.005 = 1.118179
  So, to receive 200,000 Swiss francs, you would need to pay 200,000 / 1.118179 = €178,862.23
• Case 4: The financial intermediary applies a margin of 0.25%. The proposed exchange rate is therefore: 1.12377 / 1.0025 = 1.120967
  Therefore, to receive 200,000 Swiss francs, you would need to provide 200,000 / 1.120967 = €178,417.38

There are two points to note:

• The difference between the highest margin (1.5%) and the lowest (0.25%) is just over €2,200.
• The higher the bank’s margin, the higher the amount to be paid in euros, for the same loan amount (200,000 Swiss francs).

This example clearly illustrates the key issue with currency exchange: you need to be careful about the exchange rate that will be applied to such an amount. Find out more and ask your bank, currency exchange bureau or online broker about the fees and margins they charge.

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How can I arrange a repayment of my CHF loan through a bank other than my own?

The question that arises, therefore, is this: can you exchange currency somewhere other than your bank when repaying a foreign currency loan? The answer depends on a factor we haven’t mentioned: the type of security you have for your foreign currency loan. The security is what enables the bank to ensure that it can repossess the property should you default on your payments.

There are several types of security, but three are mainly used in the context of foreign currency loans:

1. The surety company (used in over 90% of cases)
2. The lender's privilege
3. The mortgage

Cases where your foreign currency loan is guaranteed by a guarantee company

You are completely free to exchange your euros wherever you like, and the bank has no say in the matter. Your only obligation, of course, is to repay the loan to the bank once the property has been sold.

Please note: in practice, we have found that customer advisers sometimes incorrectly state that it is not possible to exchange currency anywhere other than at the bank.

Cases where your foreign currency loan is secured by a lender’s lien or a mortgage

The solicitor will have carried out a mortgage search in advance and will be aware of the amount of the mortgage at the time of the property sale.

In that case, he will send the bank the corresponding amount in euros, usually including a safety margin to cover exchange rate fluctuations. The bank will then handle the currency conversion on your behalf, on the terms it deems appropriate.

It is important to realise that the bank is in a position of strength here, as you have no choice but to use it. It can therefore charge whatever margin it likes.

How can you still save a little on a transaction involving a security interest such as a “lender’s privilege” or a “mortgage”?

However, if the resale price is higher than the value of the guarantee, you can still be reimbursed for the difference if you wish to convert the amount into CHF. In this case, the solicitor will transfer the difference to the account of your choice.