Foreign Currency Lending
Specialist Mortgage is the largest Australian mortgage originator, operating overseas, to provide Australian property and multi-currency loans to offshore investors. We offer lending in AUD, Singapore, HKD, US$ and UK Sterling denominations.
The main attraction for investors is the perceived cheaper interest rate of foreign currency loans, but in reality nothing is cheaper in the real world. It is important to make a distinction between interest rate and face value rate. Interest rate is the true interest cost, including currency adjustment, divided by the amount leant, while face value is the mathematical calculation of the interest due in the currency of lending.
Many people are lured by the lower face value interest rate of loans in other currencies, where in truth the difference between all interest rates face value is simply the implied currency risk associated with the lending. In lending in a different currency to the asset acquired, the financier is simply passing any currency exposure to the borrower rather than themselves. For example if the Australian interest rate is 6% and the US rate 3.5%, then the imputed currency risk is the 2.5% difference. Therefore, as long as the currency does not depreciate by more than 2.5% over the year you have a saving.
The difficulty is in trying to predict where the currency may shift to. You have to be careful not to have the currency flow the opposite direction on you as you can potentially owe more than your property is worth if you miss a currency correction. Furthermore any currency losses will not be tax deductible against any capital gains on your property.
As a rule, Non-Australian borrowing is only attractive at a time the Australian dollar is perceived to be weak as opportunity to make interest savings and currency gains are maximised. When the Australian dollar is considered strong it is always best to borrow in that currency, especially as the property remains as an Australian dollar asset. In the same way, foreign currency loans become most attractive when the Australian dollar is seen to be weak as the potential for currency gain is increased and this combined with the lower yield rate can be very attractive. The difficulty is in assessing what is weak or strong! If the currency seems to offer no clear direction or is considered stable, a safety position of Australian dollars is the preferred lending, as it is protected by the asset value.
An ability to switch currency is essential to minimising risks associated with foreign currency loans as you can react to shifts and follow trends. It is always important to be cautious with foreign currency loans, as the movement in exchange rates can be very quick and severe, whereas the underlying asset, the property, is very stable and cannot be disposed of quickly.
Given that property investment is considered long term in nature, you would have to monitor the short term movements of currency should you choose to lend in a non AUD currency. Many investors consider the potential savings of foreign currency lending to not warrant the risks associated with currency movement, however it is a very personal choice and one that should be made with full understanding of the risks and benefits involved.