Virtually all mortgage borrowers go with a mainstream UK lender to make the biggest purchase of their lives, it's the done thing and to be honest most people don't realise there is a viable alternative - the foreign currency mortgage.

Interest rates are reasonably healthy in the UK at the moment, particularly in comparison with the 1980s, however interest rates are a lot higher here than they are in the Eurozone, Switzerland, America and Japan.

Did you know that you can borrow the capital you need for your house purchase in Euros, US dollars, Swiss Francs or Yen instead of Sterling? This means that you could take advantage of the lower interest rates elsewhere, securing the loan on your house.

These 3 month money market interest rates allow you to compare UK interest rates with other countries:

Japanese Yen 0.12% Switzerland 1.03% Eurozone 2.46% US $ 4.48% Sterling £ 4.64%

(Source: 3 month Money Market Rates, Financial Times, 9 Dec 2005)

As you can see, Sterling is significantly higher than some of the others. However, you will lose out on some of that advantage because you will pay a premium to borrow currency from another country. Still, if interest rates continue as they are at the moment, then there are still large savings to be made.

You're probably wondering why, if the savings are so good, only 1% of UK householder mortgages are taken out in overseas currencies? Unfortunately, there are other factors to consider.

Interest rates - can be unpredictable and even though they have been stable for years, anything unexpected could happen to affect them (eg the 9/11 attacks). If interest rates in the country you were borrowing from increased, then you would lose a lot of the advantage between the foreign currency mortgage over the standard UK mortgage.

Exchange rates - herein lies the most unpredictable area of risk. Because you borrowed in Euros, for example, the loan must be repaid in Euros. If the Euro/Sterling exchange rates were linked and increased and decreased at the same rate, then it wouldn't be a problem, but of course that's not the case.

If Sterling strengthened against the Euro, then you will be quids in. To repay the loan, you wouldn't need to convert as much Sterling into Euros, and you would make a big saving. That's the scenario that makes the foreign currency mortgage so attractive.

However, if Sterling falls against the Euro, then you will be out of pocket, having to repay effectively more than you initially borrowed. It's a huge gamble, and your home will rest on it. Your home will be at the mercy of the exchange rates, so you could win, or lose, a significant amount of money.

To get a foreign currency mortgage you will need a deposit of at least 20% for your house purchase, so you will need to have a good cashflow to arrange it.

There is an alternative to the above, one that represents less risk. You can link your UK mortgage to an interest rate in a different country. This means that you are not gambling on the exchange rate, but you will still be subject to the interest rate, in the hope that they will not at any point exceed the UK interest rate. There is less risk involved, however these kinds of mortgages do tie you in for a longer period, ie 5 years, and the redemption penalties will be more than nominal. There is a certain degree of flexibility though, and you can often transfer the mortgage to another property if you want to pay the loan off early.

The above option is particularly popular with mortgages linked to the Swiss Franc interest rate, because their interest rates have stayed at beneath 1% for the last four years. The Eurozone interest rate is also very stable, and has not moved in five years.

Whatever your decision, and even with a UK mortgage, it's a gamble and deserves a lot of thought. It's probably worth talking to a financial specialist about it. There's big savings to be made, but have you got the stomach for it?

About the author:

Michael writes for Brokers Online who offer critical Illness and most UK financial services including mortgage quotes. Visit our family finance blog for useful tips on UK finance.