Today, there are Russians having their homes foreclosed upon because their mortgage is priced in U.S. dollars while their home currency that they earn money in, the Russian ruble, has lost half its value in the last 6 months. During the 2008 financial crisis, Icelanders were foreclosed upon whose mortgage was in Euros while the Icelandic kroner collapsed in value. Romanians are protesting because many took out mortgages in Swiss Francs which jumped up in value. And finally, U.S. homeowners with variable interest rates lose their homes when their mortgage resets at a higher interest rate.
All of these foreclosures are predictable and preventable mistakes by the financially illiterate. In each instance, the borrower tried to lower their mortgage payment a tiny speck by taking on giant additional risks that they could not manage or afford. In these cases, they were pushed out of their home by something they could not control; either a move in currency rates or interest rates.
Matching assets and liabilities is a banking-101 concept of aligning a loan to a particular asset. In the case of a mortgage, when you take out a loan against a large asset, that loan must match the earning currency to make loan payments and not reset the interest-rate during the time frame you are planning to own the asset. When you take a mortgage tied to a foreign currency, you’ll lose your home if either your home currency falls (the money you are earning becomes worth less) or if the mortgage currency rises (your loan payments and balance become worth more). This is a giant mismatch that you should avoid or know how to professionally hedge. Be aware that hedging may only be able to protect you for a couple years while the mismatch could be for far longer than that, still forcing you into foreclosure.
Another mismatch is the timing of owning the home. When your mortgage has a variable rate it is always likely that it resets at a higher rate than today, possibly creating an unaffordable payment for your income. Interest rates typically move down slowly but jump up very quickly, likely quicker than you can re-finance to lock in a lower rate. How long do you plan on owning the home? If you plan on moving in 2-3 years, it is fine to take out a variable rate loan that will re-set in 5 years because you will have sold the home by then. But if you have no plans to move, 5 years later who knows where interest rates will be and you may have an unaffordable mortgage that eventually forces you into foreclosure. Realize when you are foreclosed upon, you lose all the equity that you have paid: down payment, home improvements, and the loan amortization – all of these will be gone. (For most retirees, 70% of their net worth is home equity or a paid-off home so they can actually afford to retire.)
So make certain your mortgage matches your home currency and the length of time that you plan on being in the home. Avoid these two predictable landmines that will force you from your home by trying to save a couple dollars in monthly payments.