Forum: money.stackexchange.com
Tags: <mortgage><loans><germany><foreign-income>
Title: Borrowing money in one country to pay off debt in another
Question: 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 ?

Answers:
sents: text: 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.
text: 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)
text: the inflation in Germany will be 2%.
text: today, the exchange rate is 100 (to make the math easier) with no transaction costs
text: So you take the following actions:
text: You borrow 100,000 EUR at 3.4% and pay off the XYZ mortgage Over the year
text: your rental income is 11,150,000 XYZ (which would have exactly paid off the mortgages)
text: In one year, the exchange rate is 107.84 (100 * (1.10 / 1.02))
text: Your 11,150,000 XYZ now buys 103,393 EUR
text: You spend 103,400 to pay off the loan for a net loss of 7 EUR
text: So just because the interest rate is much lower, you need to consider the expected inflation in both countries.
text: Generally, if the interest rates reflect the expectation of inflation, the exchange rate between the two currencies will offset the effects of interest savings.
text: 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.
answer_details: author: money.stackexchange.com/users/5363/D Stanley
score: 79
sents: text: I'm currently living in Germany and can borrow a substantial amount of money at almost no interest, effective 3.4%.
text: Do you know what you are allowed to use that money for?
text: A mortgage for a home in Germany?
text: 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.
text: Banks don't usually offer loans without: ...asking for the purpose of the loan.
text: If you intend to pay off another loan in a different country, the bank has to agree to that. ...demanding securities.
text: You have the realty in your home country as security, but does your German bank accept that?
text: 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.
text: So first ask the bank if they are OK with you borrowing money from them to pay off your mortgage in your home country.
text: It is entirely possible that they won't let you do it, so any further reasoning about the issue is futile.
text: 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.
answer_details: author: money.stackexchange.com/users/55675/mastov
score: 30
sents: text: The big risk is that there is a major shift in exchange rates.
text: 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.
text: 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.
text: If your mortgage is denominated in your home country's currency then this is not a massive problem, the rent still covers the mortgage.
text: If your mortgage is denominated in Euros then you have a big problem.
text: Each rent payment buys you far less Euros than before, but the bank still expects to get paid.
answer_details: author: money.stackexchange.com/users/34048/Peter Green
score: 23
sents: text: I'm currently living in Germany and can borrow a substantial amount of money at almost no interest, effective 3.4%.
text: Generally a Bank in Germany not give you a mortgage for property outside of the country as it becomes difficult to foreclose if delinquent.
text: The Bank may still give you a personal loan or loan against collateral.
text: They may ask for certain guarantees and may ask for purpose of loan ...
text: This can be advised by the Bank in Germany.
text: Say if they grant a loan and you transfer to your home country; please check if This can be treated as home loan.
text: Most countries provide tax benefits on home loan.
text: You may not get this benefit if you get a loan from outside your country.
text: Repayment of loan.
text: If you are earning sufficient in Germany and don't need funds from your home country; then you may be OK.
text: Else check with regulations in your home country about repatriating funds back to Germany.
text: Quite a few countries have regulations in place that can make it difficult.
text: Conversion to currency of home country.
text: 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.
text: i.e. the interest rate are linked with inflation and lined to currency exchange rates.
answer_details: author: money.stackexchange.com/users/1113/Dheer
score: 9
sents: text: This is too risky for the average person to contemplate.
text: Suppose that your home currency suffers a crash, and ends up at 50% of its previous value versus the euro.
text: Your rental income in euro and the value of your properties in euro has now halved, but the interest payments are the same.
text: You should always borrow in the same currency as the income that will be used to service the debt.
answer_details: author: money.stackexchange.com/users/2325/Mike Scott
score: 1

Summary of the answers:
You will have to ask your bank if you can pay off a mortgage in another country. The exchange rate between the two countries might offset the effects of interest savings.
If the inflation in the foreign country is not as high as the interest rates indicate then you might save a little by borrowing at a lower rate. The bank will need to agree to this and may demand securities. You are usually asked what the purpose of your loan is. Shifting exchange rates are also a big risk. This is generally to risky for the average person.