In this article, members of the Scottish Currency Group (SCG) continue their series explaining how a separate Scottish currency can be introduced soon after independence, and the implications for the Scottish economy, Scottish Government, businesses and households.

The article reflects SCG views on the policies which the group believes should be adopted in the future.

How will a Scottish pound affect my mortgage, credit card and personal loan?

All loans will stay exactly as they are in sterling until you instruct your bank to change them. There will be no automatic conversion into Scottish pounds.

Your bank will contact you near the time and ask if you would like to change your mortgage into the Scottish pound or take out new Scottish pound credit cards and loans.

The banks, Scottish Government and the Scottish central bank will run an information campaign to explain to you the risks and benefits of changing loans into Scottish pounds compared with leaving them in sterling.

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It is likely that the central bank will assist/require the banks to provide the same interest rates and terms on replacement Scottish pound mortgages and loans as you had on your old sterling ones.

Background information: There are about 900,000 mortgages with a total outstanding debt of

£75 billion, making the average mortgage £83,000. That is about 30% of Scottish households meaning that 70% of households do not have a mortgage to worry about.

If I change my mortgage how does this work?

Your bank will contact you several months before the Scottish pound is launched. You should reply promptly to confirm that you want to change your mortgage.

This is because it is best if your bank does this during the exchange period, probably the first two months or so after the launch of the Scottish pound. That will avoid you having any currency fees to pay or any risk from exchange rate changes.

So your current sterling mortgage would be replaced by a Scottish pound one of exactly the same amount. After you instruct your bank to arrange a Scottish pound mortgage, you will complete the standard process of selecting a mortgage (fixed-term, tracker, etc), an updated valuation if required and the legal paperwork.

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On the date agreed with your bank they will release the Scottish pound funds, exchange those into GB pounds, and use those GB pounds to repay your old mortgage.

Your old GB£ mortgage account will be closed and you will be left with just your new Scottish pound mortgage account.

You can also do this after the exchange period but the longer you delay the more likely that the Scottish pound and GB£ values will diverge, in which case it might cost you either more or less in Scottish pounds to repay the GB£ loan.

If you keep your mortgage in GB£, then you should be aware that you are taking a risk on the exchange rate. If the GB£ falls against the Scottish pound the loan will cost you less, but if the GB£ rises then it will cost you more to repay it.

Background information:

By far the biggest component of personal debt is mortgages. Exact data for Scotland is hard to find, but personal loans, credit cards, and overdrafts probably total less than £20 billion.

As there is no change to sterling debts until such time as people and business ask for their banks to exchange them into Scottish pounds, then it is expected that the exchange of debts into Scottish pounds will lag significantly behind the exchange of deposits and cash.

As with mortgages, exchanging a debt into the new currency involves paying off the old GB£ loan. This means that settling these debts requires an outflow from Scottish pounds and into GB£.

For example, I take out a new S£500 overdraft and ask my bank to pay off my old GB£500 overdraft. That means my bank will sell S£500 Scottish pounds and buy GB£500.

That is most likely to be via the foreign exchange market, but may be assisted by the central bank. This will depend on whether the transaction is before or after the initial exchange period ends, and what the conditions are in the foreign exchange market.

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If there is a large or sudden outflow of Scottish pounds to redeem GB£ debts then the central bank can intervene in the market to buy up (and thus cancel) any surplus Scottish pounds.

It can do that using part of the GB£ reserve it acquired selling us the new Scottish pounds.

It should be kept in mind that there is also a long tail of people who held on to GB£ who will exchange it gradually over many months. That inflow will to a large extent mop up the outflow that is clearing old GB£ debts.