Changing currency on CHF denominated mortgage

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neilgarv

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Hi
I currently have a CHF denominated mortgage for a property in Budapest. I want to change the mortgage to a € one, to avoid double Currency risk as I am based in the UK. It states a € equivalent debt on the mortgage agreement contract, set at the point the contract was arranged. Does anyone know if there is any way of transferring the debt to € at the € amount stated on the contract, or if I converted it would it be subject to the current exchange rate? Or would it be better to just transfer to another mortgage with a different bank?
I have yet to begin paying interest instalments on the mortgage as the property will not be fully complete for another 6 weeks or so.

Thanks
 
Since when did the UK use the Euro? Why do you want to convert the mortgage to euros 'to avoid double currency risks'?

I don't quite understand what you think you're going to achieve.

Why do you think you'd be able to convert a debt in CHF to EUR at anything other than the current exchange rate?
(did you take out a forward-priced foreign currency option hedge as part of the contract)?

Will your rental income be in EUR or CHF or HUF? I assume HUF or perhaps EUR if you are renting to foreigners.
Did you buy the property priced in GBP or EUR or CHF or HUF? I assume HUF, funded from a GBP exchange transaction.
Will you sell the property to someone else priced in EUR or CHF or HUF? I assume HUF.
Is your mortgage in CHF or HUF or EUR? I assume CHF.
Are your local costs & taxes in CHF or HUF or EUR? I assume HUF.
Is your salary paid in CHF or GBP or EUR? I assume GBP.

You actually have potentially quadruple currency risk here. Not just double.

I think the general wisdom expressed on this board is that investors should keep their base purchase costs, rental income, operating costs, mortgage, and income from the final exit sale all in the single (local) currency = HUF in this case. Although others may argue that HUF mortgages are prohibitively expensive. In return I'd argue that there's almost certainly a very good reason for that and you should take that into account in your investment decision. If the interest rates are high in a country like Hungary, then there's an inherent (currency) risk somewhere else. Currency traders are a sharp bunch and will quickly close any mis-pricing in the market compared to the timescales of property investment.

By keeping everything in the local currency, any major currency risks are limited to repatriating any profits (or loss) mainly when you sell, so that the timing and thus the exchange rate is entirely under your control at that moment.

Otherwise you could get into the really bad situation where your capital value decreases (sale in HUF with property and currency deflation), and yet you have higher local costs (high HUF wage inflation), but your actual mortgage liability remains the same (mortgage debt in CHF), and the loss may even get amplified (because you are earning sterling in your normal job, and may have to convert GBP to CHF to cover any shortfall).

How will changing the mortgage debt to euros alter this situation significantly? EUR - HUF is still not fixed. Neither is GBP - EUR.
Are you planning to move to a euroland country to remove GBP from the equation before you sell out?

BTW the aim of asking so many questions is so that you can work out the best result and risks by yourself. That's all.
 
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Hi Martin77
I appreciate the response on this. I perhaps wasn`t very clear in the details I had described. All the costs/income associated with the property have been/will be in EUR:

-rental income
-Price of property
-local costs(solicitors fees, mortgage bank fees etc.)

I also expect to sell the property in EUR. This is the main reason for considering changing the mortgage to a EUR denominated one- all the future gains over mortgage value will not be affected by adverse currency movements. Also, I expect Hungary to adopt the EUR some time in the future.
The problem is at the current time, the CHF has strengthened against the Euro over the past 18mths, so if I converted to EUR now the EUR debt will be larger. Because of this, I think I`ll hold the CHF debt it for a while until hopefully the Eurozone picks up again, and the EUR strengthens against the CHF.
I`m in no rush to sell, and expect to hold onto the property for the medium to long term. Does anyone agree or disagree with my points above?
 
neilgarv said:
Hi Martin77
I appreciate the response on this. I perhaps wasn`t very clear in the details I had described. All the costs/income associated with the property have been/will be in EUR:

-rental income
-Price of property
-local costs(solicitors fees, mortgage bank fees etc.)

I also expect to sell the property in EUR. This is the main reason for considering changing the mortgage to a EUR denominated one- all the future gains over mortgage value will not be affected by adverse currency movements. Also, I expect Hungary to adopt the EUR some time in the future.
The problem is at the current time, the CHF has strengthened against the Euro over the past 18mths, so if I converted to EUR now the EUR debt will be larger. Because of this, I think I`ll hold the CHF debt it for a while until hopefully the Eurozone picks up again, and the EUR strengthens against the CHF.
I`m in no rush to sell, and expect to hold onto the property for the medium to long term. Does anyone agree or disagree with my points above?
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Not sure how you've managed to arrange all of these transactions in native Euros, rather than the underlying price being priced in local currency and then converted into Euros at the time of the transaction. But if you've really forced the currency risks onto your suppliers, then good luck to you. Having everything in Euros really does make sense then. Providing of course the cost of re-mortgaging isn't prohibitive. As you've already seen, the exchange rates will vary, even over relatively short timeframes. IMVHO It's risky enough being a leveraged property owner without having huge currency risks on top of that.
 
Neilgarv,

I think you might misunderstand the nature of your risk here.

It doens't matter what currency you bought the property in, or expect to sell it in you will have an exchange rate risk if it is in Hungary.

For example, say the Forint depreciated by 50% against the Euro, do you expect to be able to sell your property for twice the price of the identical one next door??

I suggest you get some financial advice on this.
 
Timbo said:
Neilgarv,
For example, say the Forint depreciated by 50% against the Euro, do you expect to be able to sell your property for twice the price of the identical one next door??
Click to expand...
Maybe I was being too subtle in my reply, but that's exactly the problem I was trying to point out. How do you force everyone to accept transactions in Euros at today's exchange rate so that you do not have a hidden currency risk? For purchasing off plan, I can imagine there are developers who'd take on the currency risk for you and sign a contract priced in Euros. Same with accountants and other financial service providers. I can even imagine foreign companies and tenants paying rent in Euros. But for selling a 2nd hand property at some indeterminate date in the future? I'm really not so sure how you'd achieve that hedge.
 
My understanding was that the poster was planning to hold onto his apartment for at least 3-4 years, by which time, Hungary will be using the Euro and therefore, the sale price would also be in EUR. Certainly for the time being, it's very possible to pay accountancy and legal fees in EUR. Rents are also frequently paid in EUR, sometimes even by local Hungarian tenants.
 
budapest said:
My understanding was that the poster was planning to hold onto his apartment for at least 3-4 years, by which time, Hungary will be using the Euro and therefore, the sale price would also be in EUR. Certainly for the time being, it's very possible to pay accountancy and legal fees in EUR. Rents are also frequently paid in EUR, sometimes even by local Hungarian tenants.
Click to expand...
Sure. I understand that. But the OP is still running a currency risk on the sale price of his property until that EUR-HUF exchange rate is really fixed and they start the formal conversion process. As Timbo pointed out, the neighbouring house will continue to be priced in HUF until the day Hungary adopts the Euro. And the mortgage debt would already be in Euros. Hungary certainly will use the Euro one day (they have no opt out clause). But it still isn't clear when they'll do it, and at exactly what exchange rate they'll convert. You say 3-4 years, but that could shift either way. IMVHO The OP has little choice but to accept an implicit XXX-HUF currency rate risk if he wants to invest in property in Hungary as a foreigner. I think most people will agree that in the meantime the currency risk will not go to zero, but that it's still much less risky if the OP continues his approach of pricing as much as possible in a single currency like the Euro and getting other people to take the risks, rather than running transactions in 4 currencies including HUF GBP EUR & CHF and taking the risk himself. But it is debatable and pretty opaque as to what will really happen to the EUR-HUF rate.
 
Martin77 said:
Maybe I was being too subtle in my reply, but that's exactly the problem I was trying to point out. How do you force everyone to accept transactions in Euros at today's exchange rate so that you do not have a hidden currency risk?
Click to expand...

You can't.

Martin77 said:
For purchasing off plan, I can imagine there are developers who'd take on the currency risk for you and sign a contract priced in Euros. Same with accountants and other financial service providers. I can even imagine foreign companies and tenants paying rent in Euros. But for selling a 2nd hand property at some indeterminate date in the future? I'm really not so sure how you'd achieve that hedge.
Click to expand...

The best you can do is identify where and by how much you might be exposed to adverse outcomes as the exchange rate fluctuate. For a foraign investor in a Hungarian property that would be:

Revenue stream - interest on the mortgage, maintenance costs, rental
Capital - mortgage outstanding, mark to mark value of the property.

The best way to hedge yourself is to have your mortgage in HUF. Then all your cashflows will be in HUF.

With the mortgage similarly, a HUF mortgage will be currency matched againsthte property asset.
 
Timbo said:
The best you can do is identify where and by how much you might be exposed to adverse outcomes as the exchange rate fluctuate.
Click to expand...
Maybe the very best hedge of all is simply not to invest in any assets in a currency that you can't afford to keep very long term...... which in the OP's case might mean sticking to GBP investments and forgetting foreign property altogether.
 
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