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I'm currently living in Germany and can borrow a substantial amount of money at almost no interest, effective 3.4%.

In my home country I have several mortgages, basically at the moment funding themselves almost completely via rental income. The interest rates for these mortgages are all between 11.5 to 13.2%.

On the surface it seems like a no brainer to borrow money in Germany to pay off the more expensive ( in terms of compounding interest ) mortgages in my home country.

Am I missing anything obvious here ?

Rodrigo de Azevedo
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Cillier
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    can you add the home country? – Dheer Jun 26 '18 at 09:21
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    Wow, that's terribly high on this side of the Atlantic. Mortgage rates in the US are like 4.5% now, and rental/business ones are a bit more but I don't think over 5-ish. Mine (a couple years old) is 3.75… – Kevin Jun 26 '18 at 16:56
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    @Kevin Well... it's a big world out there and most of it is different from the US. Japan, 1.2% mortgage rates, Belarus - 15%. Argentina, 28% Fancy that. – J... Jun 26 '18 at 20:53
  • @J... Interesting. Maybe I should take out a mortgage through a Japanese bank for my house in Argentina. I wonder if the Japanese bank would allow that. – dberm22 Jun 26 '18 at 21:31
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    @dberm22 - probably not, unless you are a legal resident and/or have a registered business there. They aren't likely to lend money to a person they cannot be sure will be around to pay it back. – mc01 Jun 26 '18 at 21:38
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    What kind of security does your German lender require? Or are they letting you borrow unsecured? (Most lenders won't lend unsecured funds to foreigners, other than in exceptional circumstances). – Dawood ibn Kareem Jun 27 '18 at 02:26
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    @dberm22 Japanese loans were certainly "A Thing (TM)" in the 80s London. There were several brokers touting this at various conferences. Not sure about now. – LoztInSpace Jun 27 '18 at 08:05
  • @LoztInSpace Yeah that Japanese thing ended badly. – user71659 Jun 28 '18 at 00:29
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    Are your rental incomes in Euros? In total, are they much larger or much smaller than your income in Germany? – Qsigma Jun 28 '18 at 07:43
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    Betting on currency is risky business, volatile and very dependent on large scale political events. Most people/companies even states try to avoid those bets by hedging both in front and behind. Beware - you as an amateur should be careful. There is money to be made, and there is money to be lost. – Stian Jun 28 '18 at 09:57
  • I know some people who did it between US and an Asian nation with higher rates – Alex S Jun 29 '18 at 05:28
  • It is risky to get a loan for the whole mortgage as people have pointed out, but you could do a small amount and may make significant savings. – PStag Jun 29 '18 at 09:58
  • Don't forget that current interest rates may be very different after 2-3+ years. Don't make long-term financial plans based on low interest. – i486 Jul 01 '18 at 10:00
  • When institutions do this is called the "carry trade" – teambob Jul 02 '18 at 05:36

5 Answers5

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Logistics of borrowing in a different country aside, financially if the reason the interest rates are higher is because inflation is expected to be higher, you might be trading smaller interest payments for the depreciation of your mortgage payment in the foreign country.

So let's look at this scenario:

  • the balance on the mortgage is 10,000,000 XYZ (where XYZ in the currency in the foreign country)
  • the XYZ inflation rate will be 10% (roughly in line with the interest rate)
  • the inflation in Germany will be 2%.
  • today, the exchange rate is 100 (to make the math easier) with no transaction costs

So you take the following actions:

  • You borrow 100,000 EUR at 3.4% and pay off the XYZ mortgage
  • Over the year your rental income is 11,150,000 XYZ (which would have exactly paid off the mortgages)
  • In one year, the exchange rate is 107.84 (100 * (1.10 / 1.02))
  • Your 11,150,000 XYZ now buys 103,393 EUR
  • You spend 103,400 to pay off the loan for a net loss of 7 EUR

So just because the interest rate is much lower, you need to consider the expected inflation in both countries. Generally, if the interest rates reflect the expectation of inflation, the exchange rate between the two currencies will offset the effects of interest savings.

If the inflation in the foreign country is NOT as high as the interest rates indicate (and thus the exchange rate does not go up as much), then yes you might save a little by borrowing at a lower rate.

D Stanley
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    It's probably worth pointing out that, while calculating the future exchange rate from the expected rate of inflation is probably a reasonable guess, exchange rates are notoriously hard to predict. This is especially true for "smaller" currencies where political events could cause a loss much more severe than those 7 EUR. – Baum mit Augen Jun 26 '18 at 20:52
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    @BaummitAugen The point is: If one could make any prediction about future exchange rates that deviate significantly (and if only in the expected value) from the calculations based on inflation and interest rates, then anybody smart enough could make use of that prediction and earn money - until the increased flow cancels the advantage. In other words. If you think you can outsmart the market with 10000€, someone else has already done it with billions – Hagen von Eitzen Jun 26 '18 at 21:56
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    @HagenvonEitzen Yes, I am not suggesting to use a "better" estimate in the answer; I was just trying to emphasize the extra risk OP would have to take by having debt in a foreign currency. – Baum mit Augen Jun 26 '18 at 22:01
  • You could also use currency options to hedge against the increase in the exchange rate over the subsequent year, but would have to take the premium paid into account. – cph2117 Jun 27 '18 at 15:08
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    Yes, there are ways to lock in or mitigate exchange rate risk, but the point of the answer is that the higher interest rate likely indicates higher inflation, which offset each other, so the "cheaper" loan isn't really cheaper. – D Stanley Jun 27 '18 at 17:07
  • The interest rate being higher does not just indicate higher inflation, it also indicates higher risk of default. If most of the workers in a country are at risk of unemployment or being replaced, you have to factor that into the interest rate as well. – boatcoder Jun 28 '18 at 00:36
  • If the loan is made out in OP's currency, this shouldn't be a problem. I assume it's possible, even if it is rare and unlikely to be possible. – Clearer Jun 28 '18 at 08:28
  • Since the OP currently lives in Germany, it's likely that he is paid in EUR, not in XYZ. – Fax Jun 28 '18 at 13:20
  • @boatcoder I'm assuming the credit risk would be equivalent since the collateral and borrower are the same. Actually, it would probably be higher in Germany since it would be international collateral from their point of view. – D Stanley Jun 28 '18 at 14:14
  • @Fax XYZ is the currency in the (unknown) "home country". – D Stanley Jun 28 '18 at 14:15
  • @DStanley So you're saying his income is actually 103,393 EUR, which at the end of the year could be exchanged for 11,150,000 XYZ? I think your explanation could be clearer. – Fax Jun 28 '18 at 14:49
  • @Fax The income is the rental income (presumably in the local currency) that is currently being used to pay the mortgages. – D Stanley Jun 28 '18 at 15:23
  • In short: compare real interest rates, not nominal interest rates. – henning Jun 28 '18 at 18:20
  • Even retail investors can participate in the currency futures markets so the risk you laid out can be hedged. – Dean MacGregor Jun 28 '18 at 19:08
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    @DeanMacGregor The risk can be hedged but the point is that the "cheaper" interest rate isn't that much cheaper once you take currency conversion and inflation into account. – D Stanley Jun 28 '18 at 19:20
  • @DStanley It just depends, if OP's high interest mortgage is high because of perceived risk by the lender or local market power by the lender then it could be highly advantageous to pay if off. If you're comparing, let's say, USD gov't bonds to EUR denominated German bonds then yes I'd expect any interest rate difference to be due to differences in expected future inflation. However there are more things at play in OP's situation. – Dean MacGregor Jun 28 '18 at 19:25
  • So, by doing the reverse, i.e borrowing money in his home country and paying a mortgage in Germany, would he save 7 Euro ? – Our Jul 01 '18 at 14:30
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    @onurcanbektas Possibly. It depends on the future exchange rate (I used the expected future exchange rate based on hypothetical inflation figures). The point is, that inflation and conversion rates are accounted for in the difference in interest rate, and should be roughly a wash. – D Stanley Jul 02 '18 at 13:56
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I'm currently living in Germany and can borrow a substantial amount of money at almost no interest, effective 3.4%.

Do you know what you are allowed to use that money for? A mortgage for a home in Germany? Different purposes cause different interest rates and conditions, e.g. a mortgage is cheaper than a consumer credit, which in turn is cheaper than a credit card.

Banks don't usually offer loans without:

  • ...asking for the purpose of the loan. If you intend to pay off another loan in a different country, the bank has to agree to that.
  • ...demanding securities. You have the realty in your home country as security, but does your German bank accept that? Cross-border foreclosure might be difficult, different legal standards may apply and there might be different evaluations of the realty price, all of which might be deal breakers for the bank.

So first ask the bank if they are OK with you borrowing money from them to pay off your mortgage in your home country. It is entirely possible that they won't let you do it, so any further reasoning about the issue is futile. If they do go for it, the economic sense of the operation has to be discussed, the issues of which are nicely explained in D Stanley's answer.

mastov
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    ... Then you have part of your answer, because if the rental income that currently pays for the mortgages is in a different currency than the loan payments in Germany, you have suddenly also acquired a future exchange-rate risk. – hmakholm left over Monica Jun 26 '18 at 15:14
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    @HenningMakholm True. I was focusing on the feasibility, not on the economic sense, mostly because I'm thinking the bank won't even go for it. – mastov Jun 26 '18 at 16:09
  • Perhaps an extra element here is that since there is a mortgage on the realty, the odds are very unlikely that the German bank will see that as a security, even if it would accept realty in general. Although strictly speaking that is possible, it introduces a risk for the bank. So this would only count as a very small security. – willeM_ Van Onsem Jun 27 '18 at 16:08
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The big risk is that there is a major shift in exchange rates.

As pointed out in D Stanly's answer exchange rates can shift in the long term due to differing inflation rates in the two countries but more importantly for you they can also shift rapidly and unpredictably in the short term due to political/economic events.

So suppose there is an event that causes the value of your home country's currency to collapse compared to major world currencies like the Euro. If your mortgage is denominated in your home country's currency then this is not a massive problem, the rent still covers the mortgage.

If your mortgage is denominated in Euros then you have a big problem. Each rent payment buys you far less Euros than before, but the bank still expects to get paid.

Peter Green
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    As an example of this, back before 2015 a lot of low-interest-rate Swiss Franc mortgages were taken out in Poland, Romania and Hungary where domestic interest rates were much higher. When the Swiss central bank's euro peg became unsustainable the value of the Swiss Franc soared and those mortgages became much more expensive. The carnage was so great those countries had to bail out those affected; some more info in an article at https://notayesmanseconomics.wordpress.com/2016/10/12/whatever-happened-to-those-with-swiss-franc-mortgages-around-europe/ – timday Jun 26 '18 at 17:01
  • This happened in Spain, too. I think mortgages rated in Swiss Francs were found all over the EU. – Pere Jun 27 '18 at 23:14
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I'm currently living in Germany and can borrow a substantial amount of money at almost no interest, effective 3.4%.

Generally a Bank in Germany not give you a mortgage for property outside of the country as it becomes difficult to foreclose if delinquent.

The Bank may still give you a personal loan or loan against collateral. They may ask for certain guarantees and may ask for purpose of loan ... This can be advised by the Bank in Germany.

Say if they grant a loan and you transfer to your home country; please check if

  • This can be treated as home loan. Most countries provide tax benefits on home loan. You may not get this benefit if you get a loan from outside your country.
  • Repayment of loan. If you are earning sufficient in Germany and don't need funds from your home country; then you may be OK. Else check with regulations in your home country about repatriating funds back to Germany. Quite a few countries have regulations in place that can make it difficult.
  • Conversion to currency of home country. If your home country is in different currency; then FX Conversion of moving funds into home country and moving back often negates the interest rates. i.e. the interest rate are linked with inflation and lined to currency exchange rates.
Dheer
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    Apparently some German banks will give such mortgages, but with a few critical conditions. For instance, it might be possible to buy a house just across the German border in the Netherlands, Luxembourg, France or Austria if your job is in Germany near those borders, or vice versa. These countries are also in the Eurozone so there's indeed no currency risk. – MSalters Jun 26 '18 at 14:18
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This is too risky for the average person to contemplate. Suppose that your home currency suffers a crash, and ends up at 50% of its previous value versus the euro. Your rental income in euro and the value of your properties in euro has now halved, but the interest payments are the same. You should always borrow in the same currency as the income that will be used to service the debt.

Mike Scott
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  • how is this answer different to https://money.stackexchange.com/a/96846/72799 – JCRM Jun 29 '18 at 12:57
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    It’s more concise, and it mentions the effect of currency fluctuations on the value of the properties as well as the rental income. – Mike Scott Jun 29 '18 at 14:35