A foreign currency loan is understood by financial experts as a loan in which the contract does not cover a loan amount in USD, but in a foreign currency such as B. US dollar, Japanese yen, British pound or Swiss franc.
The requirements, the type of application and the expiry of a foreign currency loan are identical to the common loan types.
A foreign currency loan can be secured by an entry in the land register. However, a land charge is noted, the amount of which is 10 to 30 percent higher than the actual loan amount. This type of loan protection is standard for the bank.
What are the special features of a foreign currency loan?
With a foreign currency loan, there are some peculiarities about which the borrower should be well informed beforehand. The following aspects in particular should be considered:
- The loan amount is granted in the foreign currency, but is paid in USD
- relatively long loan term (usually 25 years)
- the loan is usually granted from a loan amount of around USD 50,000
- the maximum amount depends on the value of the property
- no or short interest rate fixation (often only a few months)
- additional costs (e.g. foreign currency account, currency conversion fee).
The legal regulations for these loans can be found in § 244 BGB (German Civil Code). In 2016, the so-called residential property credit directive was adopted, which relates to consumer and real estate loans in foreign currency.
- This guideline stipulates an obligation for the lender to inform the borrower, for example in the event of an extreme increase (more than 20 percent) in the remaining amount compared to the originally agreed exchange rate.
Who offers such foreign currency loans and for whom?
In contrast to the typical mortgage loans or building loan contracts, the foreign currency loan is a rarely used variant of financing. It is also not offered by all banks, but can usually be found in the portfolio of smaller and specialized credit institutions.
The foreign currency loan is particularly suitable for people who deal with the capital market and are able to monitor and analyze fluctuations in exchange rates and interest rates. This is the only way to react quickly and, above all, adequately to massive changes and, if necessary, to reschedule a loan in USD.
- Due to the incalculability of long-term development, only people who have sufficiently high financial reserves with which they can compensate for any additional costs should take advantage of such a foreign currency loan.
Why are foreign currency loans so popular?
The popularity of foreign currency loans is due to the mostly good exchange rate and the associated, often low interest rate level, which mainly affects the Swiss franc and Japanese yen. Borrowers can benefit from the good exchange rate and speculate on a permanently low interest rate level.
What is the risk of a foreign currency loan?
The greatest risk when taking out a loan of this type is on the one hand the very short phase of fixed interest rates, which means that the borrower has no long-term security.
On the other hand, the interest rate level may change during the term of the loan to the disadvantage of the borrower, as a result of an increase in the exchange rate. The appreciation of the currency and the resulting rise in interest rates naturally means an increase in the costs that the borrower has to bear.