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.