Much debate goes on in deciding whether to finance your Australian Property acquisition with an Australian dollar rate or take advantage of “cheaper” foreign currency loans.
The reality is that nothing is cheaper in the real world!
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.
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.
An ability to switch currency is essential to minimising risks associated with foreign currency loans as you can react to shifts and follow trends.
We can provide you with the pros and cons of each and assist you in determining which type of loan best suits your needs.
Remember you get nothing for nothing and assess the risks prior to your decision.
Footnote:
Consider using our unique Foreign Currency Loan Assessor to accurately work out the true cost of a Multi Currency Loan, you can find it on our Property Invetsors Tool Box
