Should I pay off a UK mortgage with the mighty dollar?

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BoggledUp
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Should I pay off a UK mortgage with the mighty dollar?

Post by BoggledUp » Fri Sep 06, 2019 4:33 pm

Back in old England, I have a mortgage on my former home, now a rental. There is about 80,000 GBP or 100,000 USD outstanding on the mortgage, which is at a pleasing 1.65%.

As the British pound has fallen to a low of about $1.25, I half think I should take advantage of that to move some dollars over (I live in the US) and pay that down. But... why would I pay off such cheap debt? That just gets me an asset priced in a low value currency, so it seems to me the low interest rate removes the advantage of the low exchange rate.

Am I missing anything here? Any international landlords have any insights maybe..?

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whodidntante
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by whodidntante » Fri Sep 06, 2019 4:39 pm

I don't know the answer to your question, but I have considered borrowing Euros at 1.5% to pay off my American mortgage. Funny how markets work. :happy

TedSwippet
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by TedSwippet » Fri Sep 06, 2019 4:48 pm

BoggledUp wrote:
Fri Sep 06, 2019 4:33 pm
Am I missing anything here?
Income tax on the notional exchange rate gain? You have to admire the savagery of the asymmetry here.

https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.

The IRS view is that the individual took out a debt of $150,000 (£100,000 x $1.50) but only had to repay $120,000 (£100,000 x $1.20). The $30,000 of debt no longer owed is regarded as gain and is taxed as ordinary income. If we reverse the situation, i.e. assume the individual took out a mortgage for £100,000 and the exchange rate is £1 to $1.20 on the date it was taken out, and at the time of redemption or capital repayment the exchange rate is £1 to $1.50, the result is a US dollar loss of $30,000. Unfortunately, this loss is a “personal” loss and personal losses are not deductible.

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unclescrooge
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by unclescrooge » Fri Sep 06, 2019 9:27 pm

TedSwippet wrote:
Fri Sep 06, 2019 4:48 pm
BoggledUp wrote:
Fri Sep 06, 2019 4:33 pm
Am I missing anything here?
Income tax on the notional exchange rate gain? You have to admire the savagery of the asymmetry here.

https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.

The IRS view is that the individual took out a debt of $150,000 (£100,000 x $1.50) but only had to repay $120,000 (£100,000 x $1.20). The $30,000 of debt no longer owed is regarded as gain and is taxed as ordinary income. If we reverse the situation, i.e. assume the individual took out a mortgage for £100,000 and the exchange rate is £1 to $1.20 on the date it was taken out, and at the time of redemption or capital repayment the exchange rate is £1 to $1.50, the result is a US dollar loss of $30,000. Unfortunately, this loss is a “personal” loss and personal losses are not deductible.
How is the IRS going to know you had a gain?
Its not like any one is sending you a 1099 for the difference.

TedSwippet
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by TedSwippet » Sat Sep 07, 2019 2:06 am

unclescrooge wrote:
Fri Sep 06, 2019 9:27 pm
How is the IRS going to know you had a gain? Its not like any one is sending you a 1099 for the difference.
That would of course be tax evasion.

fujiters
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by fujiters » Sat Sep 07, 2019 2:22 am

TedSwippet wrote:
Fri Sep 06, 2019 4:48 pm
BoggledUp wrote:
Fri Sep 06, 2019 4:33 pm
Am I missing anything here?
Income tax on the notional exchange rate gain? You have to admire the savagery of the asymmetry here.

https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.

The IRS view is that the individual took out a debt of $150,000 (£100,000 x $1.50) but only had to repay $120,000 (£100,000 x $1.20). The $30,000 of debt no longer owed is regarded as gain and is taxed as ordinary income. If we reverse the situation, i.e. assume the individual took out a mortgage for £100,000 and the exchange rate is £1 to $1.20 on the date it was taken out, and at the time of redemption or capital repayment the exchange rate is £1 to $1.50, the result is a US dollar loss of $30,000. Unfortunately, this loss is a “personal” loss and personal losses are not deductible.
I was not able to find anything about this on the IRS website/tax instructions. Is anyone else able to?
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

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firebirdparts
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by firebirdparts » Sat Sep 07, 2019 7:48 am

Are you asking for currency market timing advice? If you are, I say pay it off. I wonder if hard Brexit is really coming right now. I wonder if you want to do it just before or just after. All guesswork for me.
A fool and your money are soon partners

Topic Author
BoggledUp
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by BoggledUp » Sat Sep 07, 2019 11:33 am

TedSwippet wrote:
Fri Sep 06, 2019 4:48 pm
Income tax on the notional exchange rate gain? You have to admire the savagery of the asymmetry here.
https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.
Well heavens to Betsy. I'll need to look into that :/ Thanks Tedward.

Topic Author
BoggledUp
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by BoggledUp » Sat Sep 07, 2019 11:58 am

fujiters wrote:
Sat Sep 07, 2019 2:22 am
I was not able to find anything about this on the IRS website/tax instructions. Is anyone else able to?
Not IRS but I guess it would be this?
https://www.law.cornell.edu/uscode/text/26/988

I saw the concept referred to in a number of places on googling.

Valuethinker
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by Valuethinker » Sun Sep 08, 2019 6:58 am

BoggledUp wrote:
Fri Sep 06, 2019 4:33 pm
Back in old England, I have a mortgage on my former home, now a rental. There is about 80,000 GBP or 100,000 USD outstanding on the mortgage, which is at a pleasing 1.65%.

As the British pound has fallen to a low of about $1.25, I half think I should take advantage of that to move some dollars over (I live in the US) and pay that down. But... why would I pay off such cheap debt? That just gets me an asset priced in a low value currency, so it seems to me the low interest rate removes the advantage of the low exchange rate.

Am I missing anything here? Any international landlords have any insights maybe..?
Your logic is clear. You would be investing more in your UK housing equity and reducing your leverage.

If UK house prices rise a lot and or if GBP rises a lot this will be a good investment. If they fall further the reverse. Note leverage increases return both ways.

An important consideration is whether the UK mortgage interest is deductible in your taxes against rental income? UK taxes now restrict that but what about US?

If interest still deductible this is very cheap money.

Btw when low interest periods end on mortgages they often revert to a standard rate which is uncompetitive. You then have to remortgage except now it is not owner occupied and FCA has really cracked down on investor mortgages. You will probably pay 1000 pounds plus to remortgage plus get a much less competitive rate.

When I looked into this you needed less than 65 per cent leverage to get a non recourse investor mortgage. Remember in the UK home mortgages are normally full recourse.

In your shoes I would probably leave it unless you have lots of free USD cash sloshing around earning zero interest. And assuming you are amortising your UK mortgage balance ie it is not an interest only mortgage.

fatmike91
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by fatmike91 » Sun Sep 08, 2019 8:29 am

If you have stable income in the local currency then maybe don't pay it off.

If you don't have stable income in the local currency, then using the US dollar when it's particularly strong to retire debt in a foreign currency makes a lot of sense to me.

I wouldn't ever want the currency risk of earning dollars (for example) and having debt in the Pound/Euro (or vice versa).

/

halfnine
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by halfnine » Sun Sep 08, 2019 3:11 pm

TedSwippet wrote:
Fri Sep 06, 2019 4:48 pm
BoggledUp wrote:
Fri Sep 06, 2019 4:33 pm
Am I missing anything here?
Income tax on the notional exchange rate gain? You have to admire the savagery of the asymmetry here.

https://www.ustaxfs.com/foreign-mortgag ... rate-gain/
A mortgage for £100,000 is taken out when the exchange rate is £1 to $1.50. A capital payment of £100,000 or the remortgage occurs when the exchange rate is £1 to $1.20. This would result in a $30,000 exchange rate gain.

The IRS view is that the individual took out a debt of $150,000 (£100,000 x $1.50) but only had to repay $120,000 (£100,000 x $1.20). The $30,000 of debt no longer owed is regarded as gain and is taxed as ordinary income. If we reverse the situation, i.e. assume the individual took out a mortgage for £100,000 and the exchange rate is £1 to $1.20 on the date it was taken out, and at the time of redemption or capital repayment the exchange rate is £1 to $1.50, the result is a US dollar loss of $30,000. Unfortunately, this loss is a “personal” loss and personal losses are not deductible.
Oh, bloody hell. Thanks Ted. Another potential future crisis averted.

fujiters
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by fujiters » Sun Sep 08, 2019 10:40 pm

fatmike91 wrote:
Sun Sep 08, 2019 8:29 am
If you have stable income in the local currency then maybe don't pay it off.

If you don't have stable income in the local currency, then using the US dollar when it's particularly strong to retire debt in a foreign currency makes a lot of sense to me.

I wouldn't ever want the currency risk of earning dollars (for example) and having debt in the Pound/Euro (or vice versa).

/
OP could move dollars to pounds without using those pounds to pay off mortgage. This would lock in current exchange rate without triggering a section 988 transaction. The pounds could then be used to pay for the mortgage on the regular schedule.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham

TedSwippet
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Re: Should I pay off a UK mortgage with the mighty dollar?

Post by TedSwippet » Mon Sep 09, 2019 1:38 pm

fujiters wrote:
Sun Sep 08, 2019 10:40 pm
OP could move dollars to pounds without using those pounds to pay off mortgage. This would lock in current exchange rate without triggering a section 988 transaction. The pounds could then be used to pay for the mortgage on the regular schedule.
The currency exchange won't be a section 988 transaction, but paying off the mortgage on a regular schedule would be. Specifically, if paying the mortgage monthly, it would be twelve section 988 transactions a year. The OP may already be in this trap.

https://www.taxential.com/en/publicatio ... e-fx-gain/
What about monthly repayments?

In the example above, Mr. Johnson did not make any repayments during the years and made one lump sum payment in 2015. In real life however, most people pay their mortgages monthly and with every monthly payment they pay some interest also they down a portion of their loan balance. As a result, with every principal repayment they realize either gain or loss depending on which direction the exchange rate has gone since the day they borrowed the funds initially.

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