There has been an increasing trend of Singaporeans looking outside of Singapore to park their wealth in real estate – either as their dream retirement home, a place for their children who are university bound to stay in, or as an investment to potentially yield capital gains.
The popular choices have been Australia, United Kingdom, Thailand, Japan and Malaysia. The strengthening of the SGD has helped drawn such investment monies into countries like Australia which recently peaked interest on overseas investments. As a result, properties in Australia are deemed affordable as AUD/SGD now is at parity.
The public interest in Malaysia has somewhat fizzled out in view of the economic and political turmoil situation that is still unfolding.
Local lenders have also introduced financing of foreign property loans in view of this increasing trend of Singaporeans looking outside the little red dot to invest their monies.
Financing a property purchase in Australia
In this article, we will focus on the intricacies of taking up a mortgage loan for Australian properties.
While local banks have gone into this foray recently to lend on overseas property due to attractive margins, the Banks in Australia (through their licensed mortgage brokers) have long been offering loan packages to finance investment properties.
The obvious question is if you were to make that investment in an Australian property, where could you borrow money to bridge the purchase?
- Take up the loan from a locally domiciled Banks (UOB, CIMB, OCBC, ANZ, NAB, Westpac etc.) The Australian banks listed here are based in Singapore, abiding by lending guidelines of the MAS.
- Australian Banks and lenders in Australia itself.
While the biggest benefit of taking a loan locally is the cheaper rates (in SGD) and easier access, these two benefits appears to be negated completely by the restrictive lending products and guidelines. The combination of each bank’s lending criteria and having to adhere to the overall lending guidelines in Singapore makes it cumbersome and can be quite a taxing effort for a borrower to take up a loan from a locally based banks. Some of the restrictive criteria are:
- Inner and outer city loan quantum differs.
- Rental income of existing property overseas cannot be calculated as income.
- Rental of proffered property to be purchased cannot be factored as income (whereas the Australian lenders domiciled in Australia is able to).
- Restriction of minimum loan size.
- Acceptable minimum size of property.
- Minimum income earned of borrowers.
- Limited or no interest only options.
- Loan taken up will be subjected to Total Debt Servicing Ratio (TDSR) framework and would appear as a record in the Credit Bureau.
- Lower quantum of financing generally for overseas property.
- Margin calls may require customer to top up the loan for adverse currency fluctuations.
- They do not finance land and building contract.
- Short tenure of loan granted.
An Australian bank’s business development manager I met with recently commented they like doing non-resident loans (i.e. non Australian citizens or permanent residents) as based on their records, they have yet to encounter a single default!
While the landscape of lending to non-resident home buyers are generally not as overwhelming, they have begun to reduce their exposure to non-residents lending. Some have reduced the lending quantum, which is also known as loan to value ratio (LTV). However, most banks in Australia generally still grant up to 80% LTV.
Despite higher interest rates, most of the clients I met with still opted for an AUD loan by an Australian-based bank (hence borrowing from offshore) for the primary reason of TDSR as they may not be able to get the LTV they desire. Even if the interest is higher than a SGD loan, they do not want to fork out the huge lump sum to bridge the purchase due to the low loan quantum approved by an onshore lender.
Other features such as 100% offset account offered by offshore banks as well as interest only option up to 10 years are also deemed attractive. They also have an anti-age discrimination policy which is good news for older folks trying to secure a longer loan tenure. One of my clients who is 61 years of age manage to secure a 20 years loan tenure. If he had approached a locally domiciled bank – even if it’s an Australian bank – the loan tenure would have been only 4 years in total and highly likely that his loan application would have been rejected due to non-serviceability of the loan!
While taking a loan from an offshore banks is plausible, it does have its fair share of issues. Some clients had to deal with ill equipped mortgage brokers that do not do their due diligence on the clients and property purchased. Consequently, it presented the case wrongly to offshore banks, resulting in a long drawn and worrisome application process that goes past the settlement date and therefore getting penalised heavily for late charges.
Factors to consider with regards to an international mortgage loan
So what must a prospective buyer do if they are interested in investing in an international property?
- Ensure the project is deemed financeable by local or offshore banks, particularly focusing on the margin of finance for that particular property and the client’s profile.
- Determine one’s ability to service the loan instalment if interest rates increase.
- A negative equity situation may arise as some of the overseas properties prices has raced beyond valuations.
- Scrutinise the loan agreement for any unreasonably detrimental clause imposed by the lenders.
- Ensure one has sufficient funds to bridge the purchase as well as other incidental charges relating to the property purchase such as set up fees, valuation fees, government charges, legal fees etc.
- Know the appropriate timing to seek financing (depending on the property’s completion stage or settlement date of the purchase contract).
- Understand the elasticity of the interest rates concerning the country to evaluate the tendency for fluctuations.
- Check availability of other features that helps one to save on interest such as offset accounts.
- Long term outlook of FX involving the currencies of the loan obtained as a mortgage loan is a long term commitment.
- Seek a reliable bank officer in charge of international property loans or get the assistance of a reputable mortgage broker. Someone who will present your loan application in a manner that will likely be accorded a higher chance of approval, matching features of the various lender’s loan package to the needs of the client.
In a nutshell, an international mortgage loan can be abstruse and is not as straight forward as that of a Singapore mortgage loan. Due diligence is required as it involves understanding the loan package of lenders that are based overseas and dealing with rules and regulation of international property law of that specific country pertaining to mortgage loans. While it is not as straightforward, clients can choose the right mortgage loan once the above factors are considered and clarified to ensure clear understanding of the loan details.