Many factors affect the exchange rates and interest rates of currencies, such as political events, financial forecasts, economic stability, and inflation management. But the underlying theory remains the same. Countries that need to attract deposits generally do so with higher interest rates than countries that are doing better economically. Countries that are doing fine tend to have stronger currencies.

When It Makes Sense

Borrowing in a foreign currency makes sense only in a few circumstances. One such instance is when you don’t require the maximum debt allowed by the bank; when the bank allows you to borrow 80 percent of the property’s cost, but you borrow only 50 percent. That allows breathing room for currency and interest fluctuations.

Another instance is when you plan on repaying the borrowed amount using the same currency; using your Singapore dollar salary, for example. Also, borrowing a much smaller amount than a home mortgage is a safer circumstance.

The first golden rule when playing this game is not to borrow the maximum and to always match the borrowing currency with your planned repayment currency, if possible. The second golden rule is not to gamble on currency risk with borrowed money unless you can afford to lose it.

Borrower Beware

Financial advisers will show you past records and statistics to demonstrate that the fallout from this risk rarely happens. They will tell you that since you can get interest on the callable amount, you are adequately protected because it is money that you still own. They will tell you that when you see currencies moving in the wrong direction, you can switch back to the other currency.

I will tell you that they are usually misleading you. Often, they will not even be familiar with the basic theory of interest rates because they are blinded by the prospect of high commissions at the expense of ignoring the risks.

Many financial advisers won’t tell you that every time you switch currencies, they will make a significant profit on the bid or offer-spread of the currencies.

They won’t tell you the statistics that show how many people have been financially crippled by taking currency risks with which they are not familiar. They won’t tell you that you should never gamble on currencies with borrowed money, because you risk having the bank take your house away.

But I will tell you. As you can see, I take my job as their archenemy very seriously.

My current rant is against financial advisers who suggest borrowing in a currency with a low interest rate to purchase a home in a different country. That can work, but most people don’t understand the real risk.

For instance, some would find the appeal it purchasing a house in New Zealand using the Singapore dollar, which has a much lower interest rate than the New Zealand dollar. But there is danger in gambling with foreign currency using borrowed money.

Let’s say the new house will cost NZ$100,000. The bank will lend a maximum 80 percent of the cost. The bank will lend it in either Singapore dollar at an interest rate of 2 percent, or NZ dollars at an interest rate of 10 percent. But financial advisers often fail to tell you this critical point: based on pure interest rate theory, the NZ dollar will depreciate against the Singapore dollar by the differential of the interest rates of 2 per cent and 10 percent.

Of course, currencies and interest rates fluctuate for many reasons. The point is that if the bank has loaned you the maximum of NZ$80,000 in z. foreign currency equivalent whose value then rises, the bank will consider you to be in debt for more than NZ$80,000. A friend of mine in this situation, whose loan is far greater than NZ$80,000, recently received notice — a “margin call” — from her bank requesting a further S$175,000 to make up the difference, and she is now sick with worry.

And be aware. If you rely on NZ-dollar rentals from your new home to pay your Singapore-dollar mortgage, you are back in the currency risk trap. New Zealand dollar rental payments can in theory depreciate against the Singapore dollar over time, meaning that you risk receiving less when the rental is converted to Singapore dollars—and thus bringing in less to service your Singapore borrowings.

In some cases, the bank will allow you to give the margin-call money to them to hold on deposit, which you can earn interest on, but you continue the same risk of speculating with currencies using borrowed money. In fact, if you read the small print in your loan agreement you may find that the bank also has the right to demand a revaluation of the house if New Zealand property prices slide instead of increase. If the house valuation goes down, this has the same potential result of a margin call, in that your loan may now exceed 80 percent of the value of your house.