For those with real estate in the UK raising a mortgage there to buy in Dubai might appear a perfect solution. But beware the foreign currency exchange risk that you unwittingly undertake.
At first sight the low cost finance option for Dubai property buyers with real estate in the UK is easy enough: mortgage the UK property to buy in Dubai.
Now borrowing dollars (which has a fixed rate against the dirham) against your sterling asset in the UK looks a good deal; interest rates are slightly lower than the 6-7% charged for dirham loans in the UAE.
But don't forget that sterling and the dollar have an unstable relationship. Thus what seems a good deal with sterling at $1.80 might not seem nearly so good with sterling at $1.20.
By way of illustration: if you mortgaged your UK house for 80% of its value in dollars, and the value of sterling collapsed, then you would have a loan obligation significantly higher than the value of your sterling asset!
What would happen then if UK house prices continue to fall as they have for the past year? Your debt cover would be further eroded. And what if Dubai real estate prices also fell?
Then you would have the worst of all worlds: a large dollar debt uncovered by a sterling British asset against a property worth less than you paid for it!
Foreign currency mortgages are not for the faint hearted. The normal rule is that you should always borrow in the same currency as your income; and perhaps to that should be added that you should only secure money against assets valued in the same currency.
The danger is that for the sake of saving a few percentage points on mortgage repayments, you end up with a debt bigger than your equity due to a falling currency.
Of course, this can work the other way round. That is what leverage and risk are all about. But at least understand that by opting to borrow in a foreign currency against a UK asset there is a serious and significant additional risk.
Sure if the dollar collapses you will be better off. But ask the many foreign currency traders who lost their shirt on the fall of the euro against the dollar this year how sure you can be?
The professionals spend their lives hedging against foreign exchange risks; why on earth would you want to take on such risk when buying your home?
Indeed, in the normal 15-25 year mortgage period you are bound to be caught out at some stage – as we can be quite certain that currency movements will occur, just not when. And this might be a very expensive mistake if you happen to want to sell up for some reason within that mortgage period.
So stick with local mortgages to buy Dubai property, even if you have UK real estate to borrow against. This is not the win-win situation that it appears.