You’ve packed your bags, bought your airline tickets, and prepared the family for your relocation to Singapore to join the approximately 1.2 million other Aussie Expats around the world. All of a sudden you’re now in a situation when you have to take note of exchange rates, and somewhere along the journey our ambitions to predict exchange rate movements outpaces our actual ability. It’s then that multi-currency loans make their appearance and for many Aussie expats, the first thought is ‘what could possibly go wrong..?’
Let’s start with the basics. What exactly is a multi-currency loan?
A multi-currency loan is where you are setting up your loan or mortgage in two currencies. An example of this would be setting up a Singapore Dollar and Australian Dollar loan for the purchase of an investment property in Australia. It is quite common for the multi-currency loan to be split between a person’s income currency and that of the asset being purchased. A multi-currency loan would also typically allow you to switch between the two currencies also, which presents a key risk for many Aussie expats to ‘play’ the currency markets.
Why would anyone consider a multi-currency loan?
The key reason that many people look to set up a multi-currency loan is because of Singapore’s low interest rate environment. You may be able to set up a mortgage in Singapore Dollars in Singapore at an interest rate of below 2.0% per annum, which is clearly much lower than the 4+% being offered by the Australian banks. With such a low interest rate, you would be forgiven for wondering why everyone wasn’t jumping on this opportunity.
What are the key risks of a multi-currency loan?
The largest risk of a multi-currency loan is borrowing in one currency to finance an asset in another that is not liquid. As the bank is lending you money in one currency to purchase an asset in another, they will typically apply a ‘buffer’ to your loan. This is the maximum amount the exchange rate is allowed to change before they’re on the phone to you requesting that you top up your loan. This is called a Margin Call, which is bad news for you as you can’t sell part of your property if you need to raise funds quickly. You would have to sell the entire property, which would results in agent’s fees, settlement costs and a range of other fees and expenses.
How would a margin call actually work?
Let’s consider a case study. John is an Australian expat working in Singapore earning a reasonable income and decides to purchase an investment property in Brisbane, Australia. He decides that he wants to take advantage of Singapore’s low interest rates and sets up a multi-currency loan. The price of his property is A$1,000,000 and John is going to borrow the equivalent of A$700,000 in Singapore Dollars (SGD) from the bank to fund his purchase.
Property Purchase Price – A$1,000,000
Loan – A$700,000 = S$742,000
Current Exchange Rate – AUD/SGD = 1.06
We’ll assume that John’s Singapore bank will allow him a buffer of 10% on his multi-currency loans. This buffer of 10% means that the Australian Dollar can depreciate (fall) by 10% against the Singapore Dollar before the bank is calling John for a margin call. Let’s consider how the exchange rate movements could impact John’s investment strategy.
Appreciation of the Australian Dollar relative to the Singapore Dollar.
New Exchange Rate – AUD/SGD = 1.25
New Loan Balance (AUD Equivalent) – A$593,600
John’s loan in AUD terms has reduced from A$700,000 to A$593,600 so he’s thrilled that his debt has just reduced by over A$100,000. As it’s a multi-currency loan, John could decide at this point to convert his loan to Australian Dollars and ‘lock in’ the debt reduction. This would be an excellent outcome for John having effectively reduced his debt by over A$100,000 without it costing him a cent.
Let’s consider what could happen if it went the other way.
Depreciation of the Australian Dollar relative to the Singapore Dollar.
New Exchange Rate – AUD/SGD = 0.9
New Loan Balance (AUD Equivalent) – A$824,444
John’s loan in AUD terms has just risen by over A$124,000, and unfortunately this exceeds the buffer that his bank allows. John can expect a call from his bank requesting that he tops up his account by up to over A$120,000 to return his Loan to Value Ratio (LVR) to the original 70%. A margin call will typically result in the bank demanding that John returns his LVR to the original allowable limit, rather than the buffer that the bank allows. To make matters worse for John, he needs to quickly come up with A$120,000 as the bank will typically not allow a great deal of time for this to take place.
As you can clearly see, a multi-currency loan can introduce a new set of risks to your property investment strategy. It’s not every day that we simply have an extra A$120,000 lying around, and even if we did, is this really the best use of our funds..?
What else do you need to consider with a multi-currency loan?
Many Singaporean banks have significantly restricted the maximum Loan to Value Ratio (LVR) that they will allow on overseas properties. Typically this is capped at 50-60% of the property’s value. As long as you’re an Australian citizen or Permanent Resident, even if you’re living and working overseas, you are typically still able to borrow up to 80% of the property’s value through our panel of lenders.
It’s also important to consider what happens to your loan when you repatriate to Australia as some lenders may require you to refinance through an Australian bank upon your return home. If you are considering setting up a multi-currency loan, be sure to ask whether you can keep your Singapore loan when you repatriate.
Finally, it’s also important to consider your finance and tax strategies, and how this would be impacted with a multi-currency loan. Lower interest rates will typically result in lower tax deductions, which can impact the tax implications for your property investment strategy. Be sure to seek professional advice here to consider your own financial position.
A multi-currency loan, as is hopefully evident in this article, is not suitable for everyone, and there are many factors to consider. Always seek professional advice from an investment-savvy mortgage broker when considering your financing strategy.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
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LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.