I have heard I can get a loan to buy an Australian property in Singapore Dollars at a cheaper rate. Is this accurate?
When buying an Australian property, you have a number of choices with your finances, including the ability to borrow in a foreign currency such as SG or U.S. Dollars.
There is less choice for loans for Australian property in alternate currencies, as lenders have been reluctant to offer these types of cross currency loans since the 2008 currency crash, which saw many borrowers caught out with massive margin calls. As such, lenders now require 30 percent or more in deposits when borrowing in foreign currencies; Aussie loans typically require a 20 percent deposit.
It is true that Australian interest rates have traditionally been higher than offshore rates and this trend is likely to continue, as it is very much part of the financial culture in Australia to have reasonable deposit rates. As such, the cost of borrowing is correspondingly higher.
Interestingly, we have seen Australian rates fall to their lowest levels in more than 50 years and are now very affordable by traditional Australian standards. The Reserve Bank of Australia’s official rate was lowered to 2.25 percent in February 2015, a new low, and rates in Australia have been on the decline since the last peak in November 2010, when the official rate was last lifted to 4.75 percent. The current 2.25 percent official rate equates to a loan interest rate of approximately 4.3 percent to 4.8 percent for borrowers once the Bank Margin has been applied.
Currently, rates are between zero percent to 0.25 percent in the U.S., and 0.39 percent in Singapore. This makes lending in these currencies cheaper but, in recent times, the gap is not as wide. This is because bank margins are often wider to factor in the additional currency risk, which occurs when you borrow in a currency other than that of the property, exposing you to movements between the currencies that can change your equity in the property as shown in the table below.
As per the table, if you borrowed in SG dollars with a 70 percent loan ratio, your starting equity contribution would be A$150,000. And if the Australian dollar strengthens, then your equity would be reduced to A$100,000, due to the currency movement going against you.
You may have saved some interest, but in doing that you have lost $50,000 of equity.
With currency, this movement can occur very quickly, so this loss can come as a surprise. It should be noted that had the AUD increased, then instead of an equity reduction, you would have made a currency gain on top of the interest savings, which is an ideal scenario.
You must be mindful of the potential for the currency to move in either direction and be sure you are willing to accept the additional risk.
You also have to assess the impact of having to put more deposit down initially, as this may reduce the leveraging and tax benefits available to you.
Most importantly, the interest cost remains a tax deduction against your property rental no matter what currency the loan is taken out in.
SMATS has a unique tool called the Foreign Currency Loan Assessor. This calculates the true cost of finance, including the interest and effect of any currency movement. There is also a more detailed analysis of the requirements in managing your Multi-Currency Loan.
For anyone considering these loans, it is essential that you understand how they work, as the benefits and savings are just as significant as the downside risk. So, do your research and seek professional advice to protect yourself from the unexpected.
First published in The Finder