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The world’s worst idea: taking out a mortgage in a foreign currency

The Swiss-franc-to-Polish-zloty exchange rate is an ugly thing to look at right now (Reuters/Adam Stepien/Agencja Gazeta)
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The greatest trick the devil ever pulled was convincing people to take out foreign currency mortgages.

But it's one that's worked pretty well in Poland and Hungary, where plenty of people bought homes with Swiss francs they borrowed. These weren't really mortgages, though, so much as financial time bombs that went off on Thursday when Switzerland shocked markets by announcing it would no longer hold its currency down against the euro. The Swiss franc promptly went vertical, and Polish people who'd borrowed in it saw their monthly mortgage payments go up 22 percent quite literally overnight.

Now, taking out a mortgage is risky enough. You're betting you'll be continuously employed, and won't have any major medical emergencies, for the next 15, and maybe 30, years. And if you're married, you'd better be able to afford your mortgage on just one salary, otherwise you're taking twice the risk that you won't lose your jobs. If you have an adjustable-rate mortgage, which are far more common outside the Fannie and Freddie-subsidized U.S., then you're betting that interest rates won't rise too much. And, in any case, you're betting that real estate prices will go up, so you can either sell, refinance, or just build wealth, whatever may happen.

That's a lot of bets. But some people don't think it's enough. Not only do they decide to make a leveraged bet on real estate, but also to take a side position in the currency markets. That's what you're doing, after all, when you borrow money in a foreign currency. If, for example, you get paid in Polish zlotys, but borrow in Swiss francs, then you're effectively gambling that the Swiss franc won't go up too much against the zloty, otherwise your payments will explode. Even worse, you, as an individual, can't hedge this risk like a company could. You're just too small for it to be worth it for banks to sell you that kind of protection.

So why would anyone take this kind of currency risk? Well, the question answers itself: because it looks like a good deal. The costs, in other words, are hidden, but the benefits are not. Switzerland, you see, has lower interest rates than Poland, so Swiss franc loans do too. The siren call of these lower rates were too much for some people to resist—they knew they'd owe less at first, at the risk of owing a lot more later—and now they're paying the piper. Or, as the case may be, a Swiss bank.

It's bad enough in Hungary, where Swiss franc debt is 12 percent of GDP, that its central bank is offering to replace people's foreign currency loans with forint ones, nationalizing the losses. But hey, it could always be worse. They could be Russia, where, yes, people also took out Swiss franc mortgages that have doubled in value, in ruble terms, the past six months.

Foreign currency mortgages are so bad that even Keyser Söze would say they go too far.