Loan Payoff Strategy #3

When it comes to paying off loans typically there are 2 typical ways to work through the problem, which we can look at some alternate strategies, there is even a 3rd unorthodox way to paying off faster potentially. Today we will look at strategy #3 the most off path ideas.


3. Change the value of money.

Strategy #3
To accomplish strategy #3 we figure out a way to change the value of money. What this means is that if you have a dollar how can you make that dollar worth $1.50 or say you have a loan of $1.50 how can you make what you owe only $1.00?

Foreign Currency Mortgage
There exists a strategy which can be risky, but it's reward can payoff quite large. Instead of taking a loan in the same currency as you earn, you obtain a loan in a different currency. This is referred to as a foreign currency mortgage.

Let me give you an example. Suppose you decide you want to take out a foreign currency mortgage. The current exchange rate for yen to dollars is about 100 yen per dollar. So imagine you take out a loan for 10,000,000 yen at say 4% interest. This sounds like a lot but bare with me. Lets say your monthly payment is 1200 dollars over say 30 years (or until paid off).

Ok so the first month you get the loan you pay exchange your $1200 for 120,000 yen. Your loan is paid off some (as with any loan). Now between today and the next mortgage payment the value of the yen goes down, now the exchange rate is 110 yen to an american dollar. This means that the next mortgage payment you make of $1200 comes out to 132,000 yen. Whoa, without doing anything you just paid off an extra 12,000 yen on your loan. As long as the currency keeps devaluing you pay more with every payment. BUT WAIT, there is something more. Lets say you decide after month 1 to convert back to US dollars. Now you have a loan (lets assume you still have the full loan for ease of calculations). of 10,000,000 yen that converting back to US dollars comes to 90,9090. This means that if the currency changes by 10% your loan value changes by 10%. You have just changed the value of your money.

You can read more about it here on wikipedia;
https://en.wikipedia.org/wiki/Foreign_currency_mortgage

Foreign Loan
So another idea related to this and strategy #2 is looking for a loan. While the previous idea talks about taking the loan in another currency (in the US), this strategy looks at taking a loan in another country. Here we find a stable currency with a lower interest rate. This would enable you to pay less on interest, but you still need to deal with conversion.

Drawbacks
While there are some obvious benefits, there are also some pretty big drawbacks to these approaches. If for some reason the value of the currency you are converting to has gone up, this will cause problems with the goal of reducing the value of the loan, and/or increasing the value of your dollar. One approach I am interested in doing is analyzing currencies over time and determining whether the currency is likely to continue trending.