Conversion Limits

Consequently lending banks now agree conversion limits with their customers before they take out a currency loan to limit these dramatic increases. Typically these are set 10–15% higher than the starting loan balance. If the sterling equivalent of the client’s loan then rises to that predefined limit, the bank reserves the right to covert the loan back to sterling thus crystallising a permanent 10–15% increase in the loan and subjecting the loan once again to sterling interest rates.

The need to manage these risks led to the emergence of the multi–currency mortgage. This offered clients the flexibility of denominating their loans in the currencies of their choice and, if world events altered the outlook for this currency, the client could switch into another currency at will.

Managed Multi Currency Mortgage

A currency debt manager’s role is to seek to maintain the client’s debt in currencies that are expected to weaken against (or at least remain stable against) the pound, consistent - where possible - with an interest rate advantage. Given sterling’s long term propensity for weakness, this is no simple task. The approach of today’s leading players in currency debt management mirrors that of leading hedge funds. They blend technical and fundamental analysis, underpinned by market intelligence and experience provided by investment committees comprised of some of the industry’s most highly acclaimed economists and analysts.

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