The answer goes beyond a simple yes or no. Take for instance applying for a loan in Australia – Steve Douglas, tax advisor from SMATS, explains more below.
When buying an Australian property, you have a number of choices, including the ability to borrow in a foreign currency such as SGD or USD.
There is less choice for loans in alternate currencies, as lenders have been reluctant to offer cross currency loans since the 2008 currency crash. As such, lenders now require 30 percent or more in deposits when borrowing in foreign currencies; Aussie loans typically require 20 percent.
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 Australia’s financial culture 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 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 to 4.8 percent for borrowers, once the Bank Margin has been applied.
Currently, rates are between 0 and 0.25 percent in the US, and 0.39 percent in Singapore. This makes lending in these currencies cheaper but, in recent times, the gap is not as wide, as bank margins are often wider to factor in additional currency risks, which occur when you borrow in a different currency from the property, which can change your equity in the property as shown in the table on the left.
For instance: If you borrowed A$500,000 in SGD with a 70-percent loan ratio, your starting equity contribution would be A$150,000. 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 you would have lost $50,000 of equity.
Also, had the AUD increased, then you would have made a currency gain on top of the interest savings, which is an ideal scenario. But you must be mindful of the potential for the currency to move in either direction and be 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 Foreign Currency Loan Assessor tool at www.aussieproperty.com, which calculates the true cost of finance, including the interest and currency movement effects. There is also a detailed analysis of the requirements in managing your multi-currency loan. For those considering these loans, you must understand how it works, 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.
From The Finder (Issue 289), November 2017
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