london property at canary wharf

London Property Loan – UK Vs Singapore Banks

With Brexit deal near its finishing line, there may be renewed interest in investing in a prime London property for many global real estate investors.  Many may not be aware, especially for the benefit of Asian investors who can park their funds in the safe haven financial centre of Asia, Singapore banks have long been aggressive in lending to its Wealth or private banking clients for forays into London property market.  In recent years, some banks have gone further as to waive the need to join Wealth banking altogether in a bid to lend more outside the local property market

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We are one of the leading mortgage brokerage firm in Singapore that could help you secure that leverage to enter London property market wherever you are based.  And the best part is besides Sterling, you can choose between Sing dollar, or switch between the two whenever you have a strong conviction on currency movements.  For those looking to extend their loan capacity beyond just banks in their own domiciled country, speak to us today as we can help you with the ever-changing lending criterias and documentations needed from Singapore lenders.  To give you a low down, here’s a quick summary on the key differences between borrowing from UK banks (for those eligible) and from Singapore banks:

 

 

Information As At September 2018

Loan FeaturesUK Property Loan
From Singapore Banks
 
UK Property Loan
From UK Banks
Eligibility

 

Non-tax resident of UK;
Singapore Citizen/PR;
Onshore/offshore foreigners to Singapore
UK tax residents;
UK Citizen/PR
Purpose

 

Must be for investment only;
(both purchase or remortgage from UK/Singapore banks)
Both investment and own-use
(both purchase & remortgage)
Base Currency

 

Choice of GBP or SGDGBP only
Currency Switch

 

YesNo
Interest Rate

 

Variable rate only
(P+I, no interest-servicing loan option)
Fixed and variable
(interest-only more stringent with MMR)
Mortgage Peg

 

3-month SIBOR (Loan in SGD);
Bank’s GBP COF Or 3-month LIBOR For GBP (Loan in GBP)
Variable or tracker rate
(usually reference on BOE interest rate)
Loan-To-Value Ratio (LTV)Mostly 60% with max up to 70%
(75% for Singaporeans)
Can go up to even 100% but with higher interest rate
Minimum Loan

 

GBP200,000 to GBP300,000GBP25,000
Max Loan Tenure

 

30 years or up to age 7530 years or usually up to age 80-85
Location

 

London Zone 1-3 only;
Approved list of projects
All cities and projects
Type Of Property

 

Must be completed in 1 single disbursement, usually apartments/condoAll types completed or under construction

 

Our chart above provides a snapshot of all the key information you need to know for your London property loan be it borrowing from UK or Singapore banks.  Here’s three more considerations we like to highlight when choosing between the two:

 

Amount of expenses and debt information to be furnished

The Mortgage Market Review (MMR) put in place by FCA (Financial Conduct Authority) in UK since April 2014 has now made borrowing from UK banks a challenging experience.  Borrowers local or foreign must be prepared to answer a litany of questions on their spending habits (especially for regular items like subscriptions, childcare, etc coming out from bank accounts) in order for the banks to be sufficiently satisfied that one is borrowing within their means.  Previously lenders need only assess income to ascertain repayment ability but with MMR the onus is placed on lenders to also look at debt and spending in order to assess affordability.  This means that the entire application process may take 2-3 hours and approval can take weeks.

As Singapore banks are not governed by MMR, the level of checks conducted will not be as laborious.  For the majority of borrowers out there with employment income, most lenders would require just 6 months of payslips with 6 months of bank statements showing corresponding salary credit.  There is usually no stringent checks on spending habits and debt situation.

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Need for AUM (asset under management)

Most banks in Singapore still require “onboarding” of preferred banking especially for foreigners with income outside of Singapore.  This means parking around S$200,000 to S$250,000 in your account here.  Speak to us though as there are a few banks which could waive this requirement or you may just be asked instead to earmark a much smaller sum equivalent to 36 months of the mortgage instalment payable upfront.

Parking of funds in Sing dollar can actually become an advantage (see next point) if you know how to make full use of currency movements.  Speak to our dedicated team of mortgage consultants who can explain to you how this works and guide you step-by-step on how to secure your London property loan in Singapore.

 

Currency risk when financing in SGD – boon or bane?

Financing your London propery purchase from Singapore banks present a unique opportunity to profit from currency movements, notwithstanding the risks involved which can be mitigated.  Let us illustrate with a simple example.

Carter works in Canary Wharf for the past one year and hopes to buy his own apartment instead of renting.  He found a suitable apartment for his family near his work place that costs GBP800,000 with a 60% LTV mortgage from a Singapore bank at GBP480,000, which he took in S$ financing and converts at GBP/SGD $1.794 to S$861,120 and service the loan with an interest at 3.8% over 30-year tenure.

Imagine if the Pound recovers back to FX rate of GBP/SGD at $2.00 two years after Brexit deal by 2020, and  Carter decides to switch his loan base currency from SGD back to GBP, he would convert his loan outstanding of S$829,116 to GBP414,558.  Had he taken the loan in GBP two years ago, at the same interest rate of 3.8% over 30 years, his loan outstanding would be GBP462,160 instead.  This translates into a savings of GBP47,602 for Carter which is equivalent to a reduction of almost 10% on his original loan amount of GBP480,000!  This savings is purely from a currency bet as Pound recovers from its low and Sing dollar weakens thereby Carter’s loan became “smaller” in Pound terms.

For a more indepth understanding of how one can qualify for London property loan financing from Singapore banks, speak to our team of mortgage consultants today, obligation-free!

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.  Read our clients’ testimonials.

 

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Refinance Your London Property Loan?

BOE (Bank Of England) has just announced a quarter of percentage points rate hike from 0.50% to 0.75% this past week (2 Aug), mirroring the tightening path of its counterpart across the Atlantic.  What this means is that just like homeowners in Singapore, around 3.5m borrowers in UK on variable or tracker rate mortgages would start to see their monthly repayments head north.

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It is significant development which is not widely discussed in the financial markets afterwards or cause as much ripples as actions by US Fed.  Yet it is a vote of confidence in the resilience of the UK economy by its Central Bank, and has implications for all those exposed to the UK Economy and the Pound.  It is also significant when you look at the path of UK interest rate movements over the last few years:

uk mortgage interest rate

 

In its policy statement after the meeting, Mark Carney BOE’s governor, indicated there will be further “limited and gradual” hikes to come as the MPC (Monetary Policy Committee) sees a pick-up in economy supported mainly by household spending.  It forecast GDP growth of 1.4% this year which increases to 1.8% in 2019, with an unemployment rate that is expected to fall further from the current 4.2% and wage growth to pick up just like in the US.

There has been much debate in UK about the need to hike rates so early when there is still no light in sight in terms of a trade deal between UK and EU after Brexit, which is expected by end of the year.  This is especially so when recent statistics suggest a slowdown in the property market which the committee feels might be restricted to Central London, ie. affecting more on foreign investors.  By and large, BOE announced its intention to stay on a gentle tightening path, yet monitoring impact of upcoming events in Brexit negotiations as well as the much-feared global trade war of tariffs.

Before we go on, let us take a look at the GBP/SGD movements over the past 5 years since the Brexit vote in June 2016:

GBP/SGD exchange rate

Source: XE.com

 

It is clear from the chart, that since the lowest point of 1.689 three months after the vote in Oct 2016, the Sterling Pound has been trending up against the Sing Dollar.  In fact, the current dip in April this year presented UK real estate investors, those who had bought into the London property market after Brexit and took the loan in Pound, with the perfect window of opportunity to do a switch of currency now to profit from the gradual rise in Sterling.  Here’s what I mean by an example.

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Mr. Cheung invested into a London property after Brexit at a purchase price of £1m and took a loan in pounds at 60% LTV of £600,000.  After paying down his loan diligently over the last 2 years at an average tracker interest rate of 3% over 25 years, his current outstanding loan is at £566,768.  If he is to refinance this loan to SGD at the current rate of GBP/SGD 1.79, he converts his loan into SGD at S$1,014,514.  For the purpose of this study let us assume he continues to service the interest at 3% for the next two years when his loan in SGD terms will be reduced further to S$951,355.  Now watch. If he is going to convert this loan back to pounds and supposed the pair GBP/SGD continues on its climb to reach 2.00 by this time, that translates into an outstanding loan of £475,677.  This would be much lesser than had he continued on his existing loan in pounds for a total of 4 years from the beginning at the same interest rate of 3% which ends at £531,483.  In short, Mr Cheung would have managed to shrink his loan by £56K which is almost 10% of his original loan amount of £600,000.  In the meantime, with a recovering UK economy after Brexit, he might have also profited from a rise in the valuation of his property by 20% to £1.2m! This translates into a total gain of £256,000 and that is before exchange gains on both the profit as well as equity sum £400,000 of his own money invested from the outset, ignoring transaction costs involved.  Total returns on equity would likely be near 80% if he decides to transfer all his money back to his own domiciled currency.

 

There may be some fees involved in making the switch and refinancing to a Singapore bank, and it may come with a requirement to pay down the loan slightly as financing in SGD carries more risk to the bank than in GBP.  Still, it is more than justified by the “shrinking effect” from the loan as you can see from the example.

 

However, note that this would only work for those who bought into London property market when the GBP/SGD is already substantially below 2.00, ie. after the Brexit vote.  Otherwise, it is just a recovery in position for exchange losses on paper.  Having said that, for those super bulls out there on the Pound and believe it will rise back up to its glory days of 2.50 or higher eventually, there is no better time to buy into the doldrums of London property market now, and take the loan in SGD from Singapore banks at GBP/SGD at close to 1.80.  Speak to us now as we can bring you the most optimal financing option for your London property purchase.

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It would be not responsible-writing if I do not highlight the risk involved when taking financing in another currency from that of the underlying asset – the risk of “margin call” or call to pay down the loan.  The same “shrinking” effect explained above would turn into a “ballooning” effect on the loan when the Pound slips substantially below 1.80 and reaches new lows below 1.689.  At the same time, when that happens, you can bet that the property market goes into a turmoil with valuations dropping across the board.  The loan in SGD financing would then go over the usual LTV limit of 60% granted by banks in Singapore to foreigners (or 70% for Singaporeans).  You will be asked by the lender to pay down on the loan to bring this LTV back down to 60%, failing which the bank can recall the loan!  Another factor to take note is the pace of interest rate hikes in 3-month LIBOR interest rate for Pound (where most GBP financing is pegged to) relative to the local SIBOR (Singapore Interbank Offer Rate) for SGD financing.  The latter bears a close correlation with the US Federal funds rate whereas that for LIBOR is dependent on many factors.

 

So, caveat emptor! Investors who like to take position and benefit from a “shrinking loan” in SGD financing needs to have excess funds on the side for such paydown calls.  After all, paying down a loan reduces interest costs in the long run, as investors simply wait for a recovery in both the currency and asset price which is the reason why someone would want to enter a specific property market in the first place. Bottom line is one must have holding power.  Incidentally, it makes perfect to park excess funds early in SGD with the Singapore bank as AUM precisely for this scenario – where there will be no exchange losses when there is a need to top up or pay down. The funds are already in SGD.

 

Incidentally for this more adventurous group of investors in London property, some Singapore banks do offer a switching feature where one could switch from one currency to another and back, for a small fee.  This essentially gives the investor flexibility in terms of taking positions when they feel that the currency pair is headed towards one direction for a protracted period.  To this end, he could use the in-house view from the currency research team of the private bank or preferred banking.  Speak to us today as we can show you how to make use of such a feature.

 

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements.  We aim to build trust with clients for longer-term partnership and not just do product-pushing for a one-time deals unlike bankers.  That’s why we always present “whole-of-market” perspective including packages that banks do not pay us.  See our clients’ testimonials.

 

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BOE Raises Interest Rate

Last Thursday (2 Nov 2017), Bank of England (BOE) governor Mark Carney voted to raise interest rates by 0.25% to 0.50% the first such raise in a decade following a cut of similar magnitude just about a year ago in August 2016 right after the Brexit vote.

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It is a hugely controversial move passed with 7-2 votes from a rate-setting MPC (Monetary Policy Committee), as critics point to the weak wage growth, the pullback in consumer spending and uncertainties arising from UK’s divorce from European Union (EU) which effect has yet to be fully known.  They argue that the rise in inflation in the past year is due more to the drop in value of pound rather than economic expansion.  They call it a mistake which policy makers will have to do a u-turn soon in 2018.

 

In the press conference that followed the BOE decision, the governer acknowledged just as much that the impending outcome of the Brexit talks, a long-drawn process, will very much influence the path of future rate hikes going forward or even cause a reversal.  He said: “We’re going to be in exceptional circumstances for a period of time, certainly until there’s clear resolution of the future relationship, and even then, maybe longer than that”.  However, he and his MPC colleageus see the time as appropriate to initiate a change to a very moderate tightening stance in monetary policy, but the committee re-iterated that all future rate increases will be on a very gradual basis.  They forecast the BOE base rate to hit 1% by 2020 with likelihood of another quarter point increase in 2018 pending the outcome of the Brexit negotiations.

 

I am no economist. But there seems to be a common pattern in the thoughts of central banks be it in US or UK that they cannot wait too long to initiate the tightening process for fear that this inflation monster once awoken will be hard to tame without multiple increases in rates that would ultimately lead to the next recession.  Hence the need to send a clear signal to the financial and bond markets that the process has begun but the increase will be ultra-slow and with the path unclear dependant on labour market conditions or the outcome of Brexit talks in the case of UK.

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This is not necessary a bad thing, as central banks need to ensure a smooth and stable financial market and pre-empting the market through clever messaging is most necessary.  Indeed, sterling initially rises when the rate hike was announced but later gave up all its gains when the market digested the signal as still very much dovish from BOE.

 

On the mortgage front, those tracker rate packages that track BOE base rate would of course be higher, but it is still early days to tell if the banks would soon adjust mortgage rates with a rise in cost of funds.  Lloyds Bank, HSBC, Royal Bank of Scotlands and Barclays indicated a review would be ongoing following the latest rate hike and if this indeed leads to higher mortgage rates in the next few months, it will be negative news for a property market reeling from a stalemate due to Brexit negotiations and the stalling of Chinese money overseas (due to Chinese government control).

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To this end, Asian investors in UK property market may want to look at financing their UK properties from Singapore lenders in SGD which tracks the interbank rate in Singapore known as 3-month SIBOR (Singapore Interbank Offer Rate).  Notwithstanding this rate is projected to rise slowly mimicking that of US fed funds rate, it still hovering in the 1.00 to 1.25 range-bound.  And just like what central bankers are saying globally, it is going to be a very gradual rise up.

 

Speak to our consultants to find out more if you qualify for SGD funding from Singapore lenders for your London property investment.  Another attractive benefit for Brexit bulls out there is that when the pound finally recovers from its lows against the Sing dollar, your loan would also have shrunk in GBP terms.  Caveat – the converse is also true.  For properties in cities outside of London like Manchester which is gaining popularity amongst investors, we also work with our mortgage partner based out of London.  Speak to us today!

 

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.

 

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London Property Investment

London Property For Millennials?

I was reading how Millennials, those born in early 1980s to late 1990s or in other words those 21 to 35 years of age are now taking over as the biggest group in the labour force in America, even bigger than the baby-boomers who are retiring.  Here in Singapore this group is also the driving force behind the economy.  However in one report I also read that, compared to Generation-X just before, Millennials are more risk-averse yet expect quicker returns from investments.

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Real estate has always been cornerstone investment for Asian-based investors.  However with TDSR, a structural change in credit lending policies in Singapore, I believe the game for real estate investment has changed.  It may no longer be realistic to expect multiple-fold capital upside from investing in Singapore properties alone.  Millennials who have time on their side should seize this once-in-a-lifetime opportunity to invest for long term into the UK real estate market in the next 12 months.  Before I go on, let me re-iterate this is not for everyone.  There are inherent risks in overseas property investment.  We are not experts in this arena nor are we allowed to market real estate here in Singapore without a license.  This is just an opinion piece on what we think is an unique investment opportunity into what is long regarded a popular overseas property investment destination by Singaporeans, aided by its strong rule of law.

Last month on 29 March, Theresa May triggered the long-awaited Article 50 to start “divorce proceedings” with EU in what is likely a long-drawn negotiation process.  Key on the agenda for UK is access to a single European market which comes with the inherent free flow of both goods and people, the latter being pet peeve in the referendum last year.  Much of the world’s attention is focused on whether this is going to turn out as a “hard” or “soft” Brexit and how real is the threat to London’s status as a major financial hub within Europe, and if the global banks will be shifting out their operations to Dublin or other major cities.  This certainly has bearing on the rental demand and appeal of real estate investment in UK post-Brexit.  These and many other uncertainties will cause Sterling to swing up and down in the next 12 months while negotiations are ongoing, impeded in a way by the upcoming French and German elections.  First let us take a look at the hit to GBP/SGD from XE.com:

GBP/SGD Exchange Rate

Certainly GBP/SGD is at its lowest point in the past 30 years in fact.  Question is how much more downside is there from here and at how much will it stabilize at when more clarity emerges on the UK-EU deal?  The strength of a country’s currency is ultimately a factor of its economy and GDP.  In the months post-Brexit vote, many were surprised by the resilience of UK economy which was held up mainly by two factors.  First, a weaker Pound which drives up tourism spend and cause profits of FTSE listed companies to swell when converted back to Pound.  Indeed FTSE 100 has risen by about 16% since the vote. Second, many underestimated the action of BOE (Bank of England) which has voted to cut benchmark interest rate from 0.50% to 0.25% in August 2016, along with bond purchases, and which has continued to maintain this rate in the latest February review.

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These two factors, weaker Pound and central bank action, will continue to “steady the ship” as UK negotiates for an exit deal with EU.  Should UK emerge “unscathed” from Brexit and confidence bounces back slowly, its currency will strengthen.  And should investors keep watch and make their calculated move in the next 12 months and do a deal at the right price, locking in exchange at say another 5-10% dip from the current GBP/SGD 1.749, they might just profit from this unusual “once-in-a-lifetime” opportunity to reap both capital and currency appreciation when UK’s economy recovers from Brexit lows in the next few years.  In earlier blog posts, I have also talked about the added benefit of leveraging in a SGD loan for London property purchase when a rising Sterling would cause one’s mortgage to become smaller over time, hence magnifying the returns further.  Now you know why I think Millennials, especially those here in Singapore, who have the financial means and stability from a growing income coupled with age advantage, and with full access to Singapore lenders extending such loans for purchases in Zone 1 to 3 of London, stand to lose out if they do not take action within the next 12-24 months.  Contrast buying in London where there is perennial supply shortage leading to consistent rental demand base, versus investing in a 2nd investment property in Singapore where capital upside could be limited and rental demand is a question mark.

Before we end, let me qualify again we are not against buying investment property in Singapore, after all this is our home base where one is most familiar and comfortable with the rules and jurisdiction.  As a Singaporean we should all be proud of our Singapore homes and market our own country as an investment destination to the world.  However just like Singapore is an open economy that believes in free trade, we need to stay open to global opportunities especially in an increasingly inter-connected world in the 21st century.  Still overseas property investment comes with substantial risk and laws and regulations would also change over time.  Investors who are looking for higher returns need to be comfortable with the higher risks involved.  Still for those Millennials who aspire to build up a portfolio of global real estate over time, the opportunity brought about by Brexit should not be overlooked.  Speak to our experienced consultants today.

 

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.

 

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Once-In-A-LifeTime Chance For UK Property

How would you like to buy a prime piece of real estate in London’s famous West End like in the Royal Borough of Kensington and Chelsea and at prices that has retraced back to 2012 levels (about 25-30% lower from the all-time peak), put down only 30% the price in cash and take out a mortgage in SGD to catch the lowest (or near lowest) point of GBP/SGD say 1.50 and wait for pound to rise back eventually in 5-8 years to say GBP/SGD 2.30 and have your mortgage reduced by almost half during this time!

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Just to exemplify with some numbers, let’s say you start looking for your prized London investment property and decide to buy one at GBP1M with GBP300,000 in equity.  You took out a mortgage of GBP700,000 and are lucky enough to convert it at the lowest point of GBP/SGD 1.50 sometime within the next 6 months in the midst of some financial market turmoil when UK finally triggers Article 50 (before end of March 2017 as set by Prime Minister Theresa May).  Your mortgage when converted to SGD starts at SGD1.05M and you opted for 20 years tenure at an average rate of 3.5% p.a. Let us assume that it takes 5 years for the British economy to crawl out of the doldrums from a Brexit fallout for GBP/SGD to rise back to 2.30.  At end of 5 years your outstanding loan will be reduced to SGD843,242 or in GBP terms a much reduced liability of GBP366,626 with the stronger pound – almost half of what you took out at GBP700,000 from the outset.  Of course some part of the reduction is really your own money via the monthly mortgage repayments but the slightly bigger reduction is through currency gain.

Take note however that you will continue to service the outstanding loan of SGD843,242 in SGD unless you choose to remortgage it to another bank in GBP to lock-in the currency gains at GBP/SGD 2.30, or you decide to sell it.  And if by a stroke of luck you are able to time your exit just as well as your entry, to command say a 20% capital appreciation ie.GBP1.2M when the global economy has recovered to a large extent alongside that of UK’s, by converting your cash proceeds back to SGD you will be sitting on a windfall of SGD1.9M after conversion and paying back the loan. If you take out the original equity of SGD450,000 (GBP300,000) that you have put in plus some of the principal repayments made over the years, you would have generated a cool SGD1.2M profit for yourself!  The return is spectacular as you would have benefited in a big way from currency movements in both asset value appreciation and loan reduction.  You could not have achieved the same 266% returns if you have taken out the same LVR of 70% mortgage on a Singapore residential property, which will need the asset value to rise by over 80% on your purchase price.

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Take heed that the above example is a pure theoretical exercise and almost a best case scenario where you buy at the lowest point of GBP/SGD at 1.50 and sell when it finally returns to 2.30 level if it ever.  And it may not.  We cannot be propagating investing in UK properties without discussing the flip side of things – you get all your timing wrong and end up with negative equity.  As the pound has hit historical new lows against USD at 1.21 last week after the market come to realize the possibility of a “hard Brexit” where immigration issues take priority over all else including access to a single Euro market, it has now entered unchartered territory.  The are speculations that GBP/USD could even go to parity which has never happened, and that is our basis of where we see GBP/SGD nearing our “doomsday” forecast of 1.50.  But who is to say it will not go even lower than 1.50?  So brace for some volatility going into 2017 if you have exposure to UK assets.  We have discussed this issue in an earlier article where we have warned that should pound weakened like a bottomless pit and you are borrowing on 70%, be prepared for “margin call” or paydown of your outstanding loan in SGD as you would have breached the LTV limit with a weakened pound coupled with falling valuation – a double whammy!  And brace yourself in such situations lenders typically give you very short time like to cough up the difference within matter of days or they will foreclose on your property.

It may seem at first in this article that we are contradicting our usual advocated stance on overseas property financing – always match your liability currency with your asset currency to minimize risks.  So if you are buying UK assets which are valued in GBP, take your mortgage in GBP as well.  So why are we talking about buying UK prime property now but on a SGD mortgage to profit from currency movements?  Well a lot depends on your investment horizon.  We did caution against volatility on the sliding pound in the next two years when the complicated process of Brexit takes place in the midst of slowing global economy.  For those who are risk-adverse and prefer to sleep well at night our advice stays relevant.  However for those who are entering UK market for the first time now, probably at younger age and with a slightly bigger risk appetite and are prepared to hold out for a period of 5 to 8 years with a view that UK’s first world economy will still remain vibrant and eventually bounce back from negative effects of leaving the European Union, the next 6 months may be the best window of opportunity to make that move and bet on the recovery of both its economy and thereby its currency.

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You may not have bought your first overseas property but are planning on building up a diversified global real estate portfolio over the next 10-20 years, using leverage from financial institutions in various jurisdictions not just Singapore, we are saying to you – start with UK in the next 6 to 12 months.  With the continued pounding of the pound, this may indeed be the “once-in-a-lifetime” opportunity to enter into UK market when you look back 20 years from now.

Still this is an investment option not for the faint-hearted.  So caveat emptor!  We only recommend building up real estate portfolio in matured economies especially global trade or financial centres like London or Manhatten, where there is entrenched rental demand.   And we are not currency experts here nor do we recommend any particular project.  We can only assist in mortgage solutions for global real estate investors who are seeking financing from Singapore or UK private banks.  Contact us today.

 

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.

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UK Mortgages

UK Mortgages – Pounds Or Sing Dollars?

Lately we have been getting more questions on this after the British Brexit vote.  Obviously if one is taking a mortgage on his UK property in Sing Dollars or SGD, it has to come from Singapore banks mostly.  However if one is based in Singapore or Asia, but prefers this loan to be in Sterling Pounds or GBP, there are now more options with our expanded coverage through our exclusive tie-up with our mortgage partner firm based in London.

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In short, our clients at MortgageWise can now consider UK mortgages in GBP from both banks here in Singapore, as well as those based in London.  There are advantages and disadvantages to consider for each option, like some additional costs to take from UK banks, still it may well worth consideration for some especially those who like to “reserve” their TDSR capacity for their next property purchase here in Singapore.  After all TDSR is a structural measure and is not about to go away even if the Singapore property market crashes tomorrow – there will always be a constraint or limit to how much one can leverage for real estate investments from Singapore banks.  Speak to our mortgage consultants who can better advise you on which option to go for.

In this article, we are going to address more the issue of which currency to go for when it comes to leverage for your UK property purchases.  And we give our opinion against the backdrop of what will likely happen in a post-Brexit world where interest rate is likely to stay low in UK leading to softness in the currency as well as some likely correction in property prices.

Generally speaking we think that, in order not to have too much forex exposure, it is always prudent to service the loan in the same currency as that which it is denominated in when the loan is being disbursed, in this case in pounds for a property bought and valued in pounds.  And the reason is quite simple – there will not be unnecessary forex exposure leading to banks calling for loan paydowns in event the currency movements is against one’s bet.

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Let us give an example to illustrate what we mean.  Suppose someone takes out a mortgage from a Singapore bank last year way before Brexit for his London property purchase at the price of GBP800,000.  And the bank gives a maximum LVR (loan to value ratio) of 70% and hence disbursed a loan of GBP560,000 on 14 Sep 2015, the date of the completion of the purchase.  At point of loan disbursement, as he opted for the loan to be serviced in SGD, it was converted based on an GBP/SGD rate of 2.167 (from XE.com) on 14 Sep 2015 to SGD1,213,520, and he started servicing his loan based on this principal.  No one could have foreseen Brexit materializing and at exactly one year down the road, GBP/SGD has weakened to 1.798 on 14 Sep 2016.  Let us also assume that he has serviced his loan diligently at around SGD$6,730 for the last 12 months at an interest of 3% p.a., over a 20-year loan tenure.  His outstanding principal has now been reduced to SGD1,168,548.  But look at how much is this same outstanding loan when revalued in pounds – GBP649,915!  That’s even higher than his original loan by 16%!

The worst scenario is if his existing bank pulls the rug from under one’s feet and now reduced the LVR to 60% as part of its prudent credit policy post-Brexit and assuming that property prices has went under by 5% during this time, how much would this borrower have to pay down in such a revaluation exercise – the difference between his outstanding loan of GBP649,915 and 60% of GBP760,000 (value drop 5%) – a whopping GBP193,915 or SGD348,659!

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Such is the risk from movements in forex which could lead to “margin call” to pay down on one’s outstanding loan.  This is unlike property financing in the same currency like in Singapore’s context, margin call on a Singapore mortgage would only happen, if the bank decides so, from a drop in valuation.  Hence in times where the currency movement works against one’s favour at a same time when property prices are going through correction, it can be quite a painful double-whammy hit!

So it is not as simple as one thought – to close one’s forex exposure on monthly cashflow and opt for the mortgage repayments to be in the same currency as one’s income.  For property purchase in a different currency from one’s income, there will always be exposure to forex risks in either one of two areas – one-time exposure at loan disbursement when one buys, or ongoing exposure through loan repayments.  One needs to choose which area to close this forex exposure.  And weighing the risk-rewards between the two, it is always wiser to opt for the latter as ongoing exposure will not lead to a “big event risk” like a loan “margin call” or call for paydowns.  One should close this risk by opting for the mortgage to be in the same currency as disbursement currency, as there are other ways to “hedge” the currency risks from ongoing repayments.  For one, the rentals collected from an investment property forms part of the hedge.

Another big advantage, often overlooked, for opting for the mortgage to be in pounds – should pound weakens further it makes economic sense to pay down more on the loan using the stronger Sing dollar, thereby realizing the exchange gain.  In fact what one should do in such an instance is to remortgage one of his existing Singapore investment property or gear up for a term loan to pay down partially on his UK mortgage.  There is no change to one’s total debt position really but just a transfer from one existing mortgage to another, but allowing for one to lock in real gains from exchange movements.  Another way to look at the same concept is that one “postpone” the conversion from pounds to Sing dollar from one point in term at disbursement until such time when the currency movements is favourable with pounds in a weaker position, so one will then “convert” using less Sing dollars.  Plus there is no need to convert the whole loan at the same time, unlike if one were to opt for the loan in SGD from the start.  Having said that, the converse is also true and should pounds strengthened to beyond 2.20 or higher you will end up with a bigger loan in Sing dollar terms.  So caveat emptor.

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Incidentally this last point on the flexibility to pay down or “reduce” the loan whenever the currency is in one’s favour can become a selling point if a lender offers a dual-currency feature to switch between GBP and SGD and vice versa during the tenure of the loan.  Such a switching facility is available for our Australian property loans which I will cover in another article.  Unfortunately none of the local banks offer that now for UK property loans.

Given the current macro environment where UK is set to trigger article 50 to exit Eurozone over the next 2 years, we do think that the conditions make pounds a better option than SGD financing for UK investments.  Those who have taken out UK mortgage in SGD over the past years may need to rethink their positions.  Speak to our experienced consultants who can show you the best options available from both Singapore as well as private banks in London.

 

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.

 

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UK property loans

UK Property Loans After BREXIT

Like what I said earlier in this blog, no one can really predict the outcome of Brexit vote and what an outcome it was with final results going the opposite direction to what most analysts had expected – a 52% leave vote!

The pound has been pounded by over 10% in 1 single day last week and will continue to remain weak in the near term.  For those who have yet to enter the UK or specifically London property market and are contemplating doing so, there could not be a better time when a major crisis of such proportion hits.  I have read that experts now forecast a drop in real estate prices in central London by 10% over next 2 years as Britain negotiates a tricky and complicated “divorce” from EU.

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For Singaporeans who have already bought into the UK property market, although asset value may have dropped somewhat in the short term due to forex, the good news is interest costs has also gone down by the same token.  Bank of England (BOE) is also widely expected now to cut rates in 2nd half of the year in a bid to get growth momentum going and that translates into “double bonus” for Singapore investors with gains from both currency exchange and the drop in nominal interate rate.

For Singaporeans or Singapore-based PRs with London properties that are going to complete soon this year or in 2017, given the current climate and expected trending, it certainly makes a lot of sense to use leverage rather than full cash come TOP of their condos.  Firstly we always advocate using leverage for investment properties as there is rental cash flow to help service the monthly repayments.  Next, if the pound should weaken further from here, one could then benefit from doing this currency conversion progressively over time via monthly repayments on the mortgage, rather than a lump sum payment on TOP in the next few months.

The next question to ask for UK property loans is whether to borrow in SGD or GBP.  The former is normally pegged to the benchmark cost of funds (COF) for SGD – 3M SIBOR, whereas if one borrows in GBP from Singapore banks, this is usually pegged to the 3M COF for GBP for the respective banks.  This rate varies somewhat from bank to bank depending on how much it cost for each bank to secure the GBP funding, but usually in a very narrow band.  However with all the uncertainty in the market now I do expect some banks will factor in more risks for GBP and this band might widen slightly.  In the past we see clients going for SGD-based UK property loans not only because SIBOR was low and transparent and a loan peg that most Singaporeans are comfortable with, but they also “hedged” their currency positions.  However moving forward, we see more people may decide to go with GBP loans in order to benefit from the fall in Sterling over the next 2 years as explained earlier.  Not to mention the likely cut in interest rates back in UK leading to further downside to GBP COF.  The driver for SIBOR is more dependent on actions taken by US Fed and although the risk of rate hikes for 2nd half 2016 has now diminished somewhat, once labour market conditions show improvements or if inflation start to reel its ugly head at some point, Fed might still make its move on rate.

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We think there is also some urgency now for Singapore investors to quickly sign up for GBP loans as we believe some banks might start to lower the LTV for new loans in view of the likely correction in asset values in UK in the coming months.  Get a loan early now when you can still get up to 80% LTV in some cases, or have your processing fees waived!  Or before the Singapore banks start to tweak their loan features or raise their spreads on GBP loans since COF has retreated so that the final rate levels with that in SGD financing.  Speak to our consultants quickly today as we can help you to compare which bank has the best overall features and rates for your London property financing in GBP or SGD.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements.  Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.

 

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