Impact of Exchange Rates and Interest Rates Variations on Mortgages.

 Assumptions:

 Fixed Rate Mortgage at 4.65% and assuming a Monthly Salary of KD 1,350 with an Exchange Rate at 350.64935 fils per 1 Euro, then Client can afford a loan of:

198,275.5568 Euros FOR 20 years at 4.65% pa FRM,

164,427.3533 Euros FOR 15 years at 4.65% pa FRM,

121,738.5521 Euros FOR 10 years at 4.65% pa FRM,

  67,900.1335 Euros FOR   5 years at 4.65% pa FRM.

This chart indicates that Client can apply for bigger loans for longer periods of time.

The reason for this is simple: For longer periods the monthly payment is less and this fact makes the ratio monthly payment to monthly income grow.

Now, let us analyse the impact on client’s borrowing capacity with variations in both Exchange Rates and Interest Rates.

Assuming that the Exchange Rate of Euro to Kuwait Dinar varies in the following manner:

 Euro increases by 5%, the impact is as follows:

For a Loan of 20 years @4.65% pa FRM, borrowing capacity decreases by 4.76190%

For a Loan of 15 years @4.65% pa FRM, borrowing capacity decreases by 4.76190%

For a Loan of 10 years @4.65% pa FRM, borrowing capacity decreases by 4.76190%

For a Loan of   5 years @4.65% pa FRM, borrowing capacity decreases by 4.76190%

This chart means that a positive/increment variation of 5% in the Euro to Kuwait Dinar value, will diminish borrowers capacity by 4.76190% for all terms (20,15,10 and 5 years). The effect of diminishing borrowing capacity is irrespective oo loan term, thus the impact is equal for 20, 10, 15 and 5 years.

Euro decreases by 5%, the impact is as follows:

For a Loan of 20 years @4.65% pa FRM, borrowing capacity increases by 5.26315%

For a Loan of 15 years @4.65% pa FRM, borrowing capacity increases by 5.26315%

For a Loan of 10 years @4.65% pa FRM, borrowing capacity increases by 5.26315%

For a Loan of   5 years @4.65% pa FRM, borrowing capacity increases by 5.26315%

This chart indicates that a negative (decline) variation of 5% in the Euro to Kuwait Dinar value, will increase borrower’s capacity by 5.26315%. Again here, the effect of enhancing borrowing capacity is irrespective of loan term, thus the impact is equal for 20, 15, 10 and 5 years.

Now let us see the impact on client’s borrowing capacity with variations in Interest Rates:

For a Loan of 20 years @4.8825% pa FRM, borrowing capacity decreases by 1.944534%

Fixed Rate Mortgage increases by 5% from 4.65% pa to 4.8825% pa. (Increment happens when the loan is granted and not during the loan term, thus we are dealing here with a FRM). The Impact is as follows:

For a Loan of 15 years @4.8825% pa FRM, borrowing capacity decreases by 1.529869%

For a Loan of 10 years @4.8825% pa FRM, borrowing capacity decreases by 1.070333%

For a Loan of   5 years @4.8825% pa FRM, borrowing capacity decreases by 0.564081%

This chart indicates that an increment in interest rates will overall decrease client’s borrowing capacity, though it will have greater impact with loans with long terms as opposed to loans with short terms.

Fixed Rate Mortgage decreases by 5% from 4.65% pa to 4.4175% pa and the impact is as follows:

For a Loan of 20 years @4.4175% pa FRM, borrowing capacity increases by 2.000960%

For a Loan of 15 years @4.4175% pa FRM, borrowing capacity increases by 1.563912%

For a Loan of 10 years @4.4175% pa FRM, borrowing capacity increases by 1.086593%

For a Loan of   5 years @4.4175% pa FRM, borrowing capacity increases by 1.005685%

This chart indicates that a decline in interest rates will overall increase client’s borrowing capacity, though it will have greater impact in loans with long terms.

CONCLUSION: 

 Applicant’s borrowing capacity is more sensitive to Exchange Rates variations than to Interest Rates… Thus changes/variations of the same magnitude in Exchange Rates and Interest rates will produce greater impacts on creditor’s borrowing capacity for Exchange Rates than for Interest Rates.

Joe Weberhofer

Real Estate Broker

PRIME INTERNATIONAL PROPERTIES