Traditional loans vs foreign currency loans: which should you choose?
Many cross-border workers between France and Switzerland face the dilemma of choosing between a loan in euros and one in Swiss francs to finance their property purchase. Whilst this is a more practical solution in terms of exchange rate risk, it is also more complex; find out what ultimately distinguishes a foreign currency loan from a traditional loan.
Mortgage: foreign currency or standard?
Foreign currency borrowing: a solution to exchange rate risk
Taking out a mortgage in a foreign currency is an option that any cross-border worker wishing to invest in their own country might consider. Indeed, a French citizen who is paid in Swiss francs is automatically exposed to exchange rate risk when they take out a mortgage in euros.
Consequently, taking out a loan in a foreign currency allows you to receive funds in Swiss francs which, once converted into euros, can be used to finance the property project, and then to gradually repay the amount in Swiss francs – the currency in which your salary is paid. This means that the exchange rate risk is eliminated during the loan repayment period.
Borrowing in foreign currency: a deferred risk?
However, such a foreign currency loan does not completely eliminate the exchange rate risk. Let us assume that, in the long term, the Swiss franc (which is, incidentally, regarded as a strong currency) appreciates against the euro. In that case, when the property is eventually sold in France (in euros), the amount received will have been affected by exchange rate risk. Its value in CHF will therefore be lower than it was on the date the loan was signed!
Consequently, the decision to take out a loan in euros or Swiss francs is heavily influenced by exchange rate fluctuations. Depending on the time of year and the economic climate, it may sometimes be wiser to opt for a traditional loan rather than a foreign currency loan… It’s up to you to weigh up the pros and cons!
Preparing for life’s uncertainties
When you commit to repaying a loan over several years (especially one in a foreign currency), you need to be prepared for any eventuality. One such eventuality is losing your job in Switzerland. If this were to happen, your previous salary in CHF would be replaced by French severance pay, which is paid in euros.
In such a situation, the borrower is nevertheless still obliged to repay their foreign-currency loan in Swiss francs and therefore bears the full brunt of the exchange-rate risk they were so keen to avoid!
Furthermore, other initiatives, such as transferring a foreign-currency mortgage to another bank, require you to take the new applicable exchange rate into account.
Good to know: It is sometimes possible to combine a loan in euros with one in Swiss francs, i.e. to find a compromise between a traditional loan and a foreign-currency loan.
Credit terms
Types of interest rates
A foreign currency loan may entitle any cross-border worker to an interest-free loan (PTZ).
Although this significantly reduces the costs involved in repaying a mortgage, there are numerous conditions that must be met:
- financing your first property purchase;
- finance a new purchase;
- have a limited budget (depending on the number of people in the household and the geographical location of the property).
Please note: The PTZ can supplement but not replace the main loan.
Therefore, a foreign currency loan can be advantageous provided that the borrower meets the above conditions.
Personal contribution
A French cross-border investor wishing to take out a foreign currency loan may use up to 10% of their personal contribution from the Swiss pension scheme to which they contribute through their employment in Switzerland.
In addition to this distinction, the maximum loan-to-value ratio remains set at one-third (as with a traditional loan in CHF) and is calculated on the same basis, namely:
- the household’s total income (salaries, rental income, any pensions);
- less total expenditure (loans, any pensions);
- minus the estimated monthly payments.
This calculation will enable the bank to assess the customer’s creditworthiness (or borrowing capacity) and decide whether or not to approve their application.
Your personal and professional circumstances, the current economic climate, the balance in the EUR/CHF exchange rate, or the project you wish to finance… There are many factors to consider when deciding between a loan in euros and a loan in Swiss francs.
What’s more, keeping an eye on the EUR/CHF exchange rate on a daily basis will enable you to benefit from the best exchange rates when you carry out your transaction.
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