We are a specialty boutique mortgage firm based in Singapore that helps both Sinaporeans as well as Asian-based property investors with their financing options from banks in Singapore. In a recent article, I talked about how an investor should always take out a mortgage on an overseas property investment in the same currency as that in which the subject property is valued in. That is to circumvent the risk of a “margin call” or call to pay down on one’s outstanding mortgage due to unfavourable currency movements. Does this apply to investors of Australian properties as much as that of UK properties (the only two overseas market that we cover at the moment)?
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Certainly it does in general but if you are Singapore-based investor with most of your income source in Sing dollar, you might be quite tempted to opt for a Sing dollar mortgage for speculative reasons. You see a lot depends on your view of the currency pair with AUD/SGD trading at near its historical lows (see chart from XE.com). Since the slowdown of the Chinese economic powerhouse from 2013, the pair has fallen steadily from a high of 1.30 to the current range of 1.05 range-bound. Even during the Great Recession of 2008 it went down to the 0.96 range which is not very far from where we are today. If you hold the view like some that China’s new 21stcentury fiscal policy of OBOR (One Belt One Road), which is a huge initiative to re-define and broaden the original silk road that links not just China to India, but now encompassing a region from China to Eastern Europe, Eastern Africa, Middle East as well as along the southern Maritime Silk Road to South Asia, is set to lead the next economic and commodities growth cycle, then Australia might become a beneficiary once again. And we might yet see AUD/SGD heading back to 1.30 level or higher as demand for resources go over the roof with infrastructural projects in the pipeline funded by the China-led AIIB (Asia Infrastractural Investment Bank) where many of the its members come from the 60 countries in the OBOR region.
Source : XE.com
I am neither a qualified economist nor a forex expert to be able to make any judgement call, so I will have to leave that to the savvy individual investor. Certainly there is some comfort knowing that AUD/SGD hit its base level of near 0.96 during the Great Recession and AUD has much more potential to appreciate from this point over the medium to long term. If that happens, by taking out one’s Australian property mortgage and choosing to convert the loan to SGD now, there will be minimal impact for someone earning his income in Sing dollar terms. On the contrary if you are a Singapore-based investor and you take the loan in AUD terms, you might see your mortgage horribly ballooned over time even as you strive to pay down your mortgage diligently over the months. Hence this decision can be quite a tricky but critical one at the point when you draw down your loan near the settlement of your purchase.
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The option of Sing dollar financing for Australian property purchases may not be available to all depending on one’s nationality, tax status and income source currency etc. Also it may be noteworthy to some that lenders here in Singapore can even offer certain clients a dual-currency mortgage option where the borrower can take differing positions over time in SGD versus AUD and opt to switch from one currency to another throughout his loan tenure. Do speak to our mortgage consultants who can better advise you what are the best options available from Singapore banks at the moment, and the maximum loan a foreigner could take out within Singapore’s TDSR (Total Debt Servicing Ratio) framework which now stands at 60%.
Now if you are not from Singapore but another Asian country with income source neither in SGD nor AUD, you have more considerations to mull over. Obviously you will need to consider and take positions in more than 1 currency pairs. However with SGD often touted as the safe haven currency of sorts in this part of the world, due to Singapore’s stable socio-political environment and forward-looking government planning and economic policies, the rising middle-class and HNWI (high networth individuals) in Asia might want to consider parking some of their funds here in SGD which will then facilitate the servicing of their mortgages in Sing dollars. This might also turn out be a smart thing to do as lenders in Singapore might be more prepared to lend out in SGD to non-citizens for their Aussie property purchases when they agree to join the bank’s priority or private banking with the commitment of a certain minimum AUM (asset under management). Should the scenario of AUD/SGD at 1.30 materializes, AUD would very likely have also appreciated against all major Asian currencies, however your funds parked in Singapore has already been converted to SGD earlier and now serve as a “hedge” for you. You may opt to use these funds to pay down the SGD loan if you like.
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Finally having talked so much about the benefits of doing this “conversion” of your Australian mortgage from AUD to SGD to take advantage of the favourable exchange right now, it will not be responsible for us not to highlight the flip side risk – which is if AUD/SGD is to depreciate against all odds to 0.96 or worst going below 0.90? Well the biggest risk to that, which we have covered in great details in another article, is that of a “margin call” or call from your lender to pay down on the loan, as it would have breached the LVR limit (usually 60-70%) in AUD terms. So caveat emptor!
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.